The Epicurean Dealmaker

Ask Mr. Dealmaker

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Tue, 23 Jun 2009 23:00:00 +0000

EDITOR'S NOTE: In our neverending quest to inform, entertain, and titillate our Devoted Readership, the editors of this publication have decided to inaugurate an exciting new series on this site, entitled "Ask Mr. Dealmaker." Designed to encompass the educational brilliance of Ask Mr. Wizard, the career savvy of Lucy Kellaway, and the psychological sensitivity of Dear Abby, this new feature will appear at irregular intervals according to the unpredictable whims of our senior writer and the volume of interesting mail in our mailbag.

Should you have a question about the nature of today's global capital markets, the real, unvarnished life of a practicing investment banker, or just exactly how tall Steve Schwarzman really is, please send a stamped, self-addressed e-mail to epicureandealmaker [at] hushmail [dot] com. Should our columnist detect any redeeming value whatsoever in your query, he will respond to it in these pages as soon as he wipes the tears of laughter off his face. Unless you have a burning wish to see your identity splashed all over the worldwide interweb, the Editors strongly recommend that you use an alias in your correspondence.¹

* * *

Well, I can't believe those bastards in the Editorial Office have pushed yet another harebrained scheme onto Your Hardworking and Underappreciated Correspondent. I guess the publisher is getting a little freaked out by the relentless approach of The Permanent and Irrevocable Death of Journalism As We Know It.

He's such a pussy.

Anyway, we found one dusty letter at the bottom of the mailbag, so let's go.

MBA HONOR CODES

Dear Mr. Dealmaker —

I am an MBA student who is graduating from [redacted] Business School this year.

I am concerned that the recent financial crisis and turmoil in the global economy has tarnished the perception of an MBA degree in the eyes of the public. I have worked hard to complete my degree, and I want to make sure that people view my accomplishment in the proper light.

As you may know, some of my colleagues here at [redacted] have published a code of business ethics for managers under the title "The MBA Oath." Several commentators I respect have written favorably about it.

Do you think it would be a good idea for me to sign the Oath to show my allegiance to proper business conduct principles?

Sincerely,

Confused on the Charles
Cambridge, MA

* *

Dear Confused on the Charles —

Don't bullshit me, son. You're not worried about your reputation; you're worried about getting a job.

And given that MBAs are about as welcome in corporate America as an international tax audit, you should be. You and your MBA peers are struggling desperately to come up with some gimmick that will make the thirteen firms across the country who are still hiring trust you enough to offer a second round interview. So some cleverboots at HBS came up with the MBA Oath and stole somebody else's lunch money to print up a bunch of laminated cards for your wallets. Good luck, I say.

Here's the deal: as a marketing gimmick, the Oath is pretty slick, but as a way to generate trust among others, it sucks. For one thing, it is voluntary and self-selected. Attila the Hun, Joseph Goebbels, and Caligula could all have signed the Oath, and for all anyone knows their modern-day MBA equivalents did, too. In fact, bad guys with zero ethics have the greatest incentive to sign up to such schemes, because they hope whatever good juju accrues to the thing will rub off on them and blind victims to their misdeeds until it is too late. Everyone pays lip service to good ethics, you know, especially the bad guys. Just wait until a signatory blows up the next Enron or Madoff Securities, and then see what your precious honor code is worth.

For another thing, it suffers from the drawback that it was written by MBA students. These, as everyone knows, are formerly intelligent individuals who have been exhaustively retrained to generate clotted, jargon-ridden bureaucratese in place of straightforward, honest prose whenever possible. The thing sounds like a Fortune 100 company mission statement. (That, if you need to ask, is very low praise indeed.)

I am not opposed to public codes of behavior for functional elites. I think they can be useful reminders to their members of shared principles and values that should be cultivated. But the shorter and more general they are, the more powerful they become. Semper Fidelis, Ars Gratia Artis, and "Eat at Joe's" are good examples of this. Reconstituted along these lines, the MBA Oath would probably sound a lot like "Don't do bad things," or "Be good."

Put this way, you can see just how empty and/or disingenuous such pablum really is. Be good to whom? When? How? Under what circumstances? To whose detriment? Unlike loyalty to your comrades, artistic integrity, or even devotion to your neighborhood beanery, ethical behavior in a business context is never straightforward or simple. A businessman constantly makes decisions which harm some real or potential stakeholders, because business is composed of and affects a staggering number of people who have different and often competing interests. Business ethics are situational, which is merely to say that they depend most heavily on the particular set of circumstances and decisions at hand, rather than on some inflexible itemization of principles printed on a playing card. Often, a business decision which triggers ethical thinking is a choice among lesser evils, or one which minimizes harm, rather than maximizing good. And you have to pick and choose which oxen are going to get gored—shareholders, employees, taxpayers, etc.—because somebody has to take it in the neck.

There are no cookbook approaches to this kind of stuff. You either have ethical principles and try to apply them to the best of your ability, or you don't. If you do, the most important resources you will need are integrity and courage. If you don't, then, well, we'll probably see you on the cover of Fortune magazine one of these years.²

Sadly, for your purposes, integrity and courage are not attributes that translate well to a resumé or a job interview. But realizing that they are what matter, and saying so honestly to whomever asks, will generate a hell of a lot more credibility than reciting a laundry list of politically correct business ethics bromides. It will be up to you to prove you have the stuff—both to yourself and others—when circumstances dictate.

In the meantime, if you want my advice, here it is: Leave the Oath, take the cannoli.

Ta for now,

TED

¹ Incoming letters will be edited for length, content, style, and in any other way TED feels would contribute most to general hilarity and malicious ridicule. You have been warned.
² Whether as a hero or a goat (or both), I will leave as an exercise for my readers.

© 2009 The Epicurean Dealmaker. All rights reserved.

A Mighty Wind

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Thu, 18 Jun 2009 22:36:00 +0000

I wash my hands of this shit.

I have stated my case about the prospects and proper outlines for reform of financial regulation in this country before. Apparently, no-one with any scratch or power to do anything either a) read those pieces, b) agreed with me, or c) gave a rat's ass what I think. Fine, have it your way.

As you already know, Obama, Geithner, Summers, and crew have released their 85-page white paper outlining the Administration's proposed reforms. The most I can say about it on a family website is that it appears to have been composed with the objective of winning an obscure federal competition for the white paper which uses the largest number of capitalized initials and incomprehensible acronyms in a single document. There certainly seems to be little actual policy content of interest discernible in the mess. (Although I have sent a copy to NSA cryptographers to see whether it is really a cleverly disguised instruction manual for the conversion of sugar beets into synthetic diesel oil. It does sort of look like organic chemistry.)

Of course, everybody else in the commentariat and his hamster has already weighed in on the plan. Feel free to expose yourself to this spectrum of opinion, if you will. For those of you with limited time or tolerance for having your face sanded with a cheese grater, however, let me offer up my comprehensive, unbiased summary instead: [ white noise ].

It just doesn't fucking matter.

* * *

Many members of the punditocracy, including your Frustrated and Increasingly Irritable Correspondent, have commented at length on what is charmingly known as "regulatory capture." This is the phenomenon—most aptly demonstrated by the historical relationship in this country between the financial sector and its regulators over the last several decades—whereby the regulatee worms its way into the mind, practices, and governing philosophy of the regulator to such an extent that it effects something like a reverse Stockholm syndrome. The regulator adopts the objectives, goals, and mindset of its supposed charges, and becomes hostage to the institutions it is supposed to regulate.

Let me suggest here that this conception, while empirically valid, is at once both too narrow and incapable of explaining why the current Administration, with the mighty wind of a once-in-a-generation financial system collapse and the massed voices of millions of pitchfork-toting Americans at its back, has been unable to deliver a policy document which is worthy for use as anything other than toilet paper in the visitors' restrooms on Capitol Hill. Rather, in order to understand this epic regulatory fail, we need to broaden our concept to encompass the idea of complete inside-the-Beltway capture.

Forget the no doubt significant fact that substantial portions of the Administration's regulatory proposals were authored by products of a government-to-industry-to-government merry go round like Hank Paulson, Larry Summers, and Tim Geithner. Forget the fact that the Administration is said to have consulted heavily with industry participants and lobbyists for input on proposed regulations. No, what really matters at the end of the day is that the Commodity Futures Trading Commission is overseen by the House and Senate Agriculture Committees.

"Agriculture committees?," you say, "You're shitting me, right?"

Sadly, no, I am not shitting you.

* * *

You see, the story goes that the West Wing politicos read the tea leaves and figured out that the most important and effective thing they could do to reform financial regulation in this country—consolidate the current alphabet soup of ineffectual, overlapping, squabbling bureaucracies into a coherent, unified agency that would be able to regulate entities across markets and industry subsectors according to what they do, as opposed to what they are—was politically impossible to get through Congress. Too many Congressmen and Senators have made a lifetime meal ticket out of the industry lobbying and political contributions that come from the financial sector, and too many have accumulated meaningful institutional leverage within their legislative bodies by virtue of membership on powerful regulatory oversight committees. Through various historical accidents and parliamentary shenanigans over the years, oversight of the grab bag of financial regulators has gravitated toward a host of separate and often competing Congressional committees. There is no way on God's green earth that any Congressman in his or her right mind (or the rest of them, for that matter) would give up that kind of political power voluntarily.

And, notwithstanding concerted efforts by certain elements of the conservative press to the contrary, Congress has largely escaped blame for the situation we find ourselves in. Sure, there are good arguments that political and legislative agendas over the past decades helped contribute to the financial sector pile-up we have just lived through. But let's face it: no-one in this country honestly believes their Congressman or Senator knows anything about finance, derivatives, or the capital markets. Based on recent evidence, it would take a heroic effort to convince them otherwise (and you would still have to explain Maxine Waters). No knowledge, no culpability. Congress has gotten off largely scott-free.

But this is the problem. If the voting public truly believed Congress had been an integral part of the problem, the Administration would have a legitimate political rallying point and enough momentum to push through a regulatory plan that entails a parallel shake-up in the committee oversight apparatus in Congress. We might have ended up with a plan that combined the regulation of securities with the regulation of their siamese twins, derivatives, in the form of a merged SEC and CFTC. Instead, the only existing regulator to get the axe is the pathetically underpatronized and unprotected Office of Thrift Supervision. Good riddance, I say, but it's sad that it has to take the pipe alone.

So here we are, with a proposed Administration reform which leaves the regulation of derivatives—the most complicated, sophisticated, and dangerous financial instruments we have, and ones which have enjoyed the least supervision and created the most havoc of any such instruments out there—firmly under the purview of an agency which is overseen by a bunch of tobacco-chewing, cowboy-hat-wearing hayseeds. Hayseeds, by the way, whose brilliance and incorruptible devotion to economic welfare and the public good has been demonstrated by their support of corn ethanol and agricultural subsidies. Fucking socioeconomic geniuses, these guys.

* * *

I have said it before: if you want to regulate financial geniuses, you had better employ some of your own. It'll cost you, but it will work. Otherwise, you are stuck with trying to control international drug dealers with helicopters, numbered Swiss bank accounts, and high-powered machine guns by using broken-down beat cops with bad knees and rusty six shooters. Law enforcement and the military have figured it out: you need elite units with state-of-the-art training, weapons, and esprit de corps to tackle the nastiest, smartest villains. When will it occur to the dim bulbs charged with supervising our financial system that they need the same set-up?

Apparently that is a bridge too far for these times. From all indications, whatever political momentum the Administration anticipated for financial reform has already begun to dissipate, even for the pathetically watered down trash they offered up yesterday. Barring some additional financial catastrophe, it appears that we will be stuck with even more ineffective bullshit regulation in the future.

Which, frankly, is just fine by me. As I said, I would have much preferred a more streamlined, effective, and efficient financial regulatory regime. Better regulations and rules not only would have helped create a healthier financial system for all of us, but also would have made the regulatory burden for the majority of us in the industry who try to make an honest living less stupid, inefficient, and nettlesome. Smarter and more effective regulators would be quicker and easier to deal with, and could actually speed and guide industry innovation for everybody's benefit. Enlightened and knowledgeable Congressional oversight could help regulators adapt and respond to inevitable changes in industry structure and environment. And actually appearing like we know what the fuck we are doing for a change might inspire other countries around the world to cooperate more closely with us in developing coherent international regulatory regimes.

But investment bankers adapt. Change is the water we swim in, the air we breathe. We will adapt to whatever stupid new regulations and incompetent, undertrained, overmatched new regulators you throw at us. And we will come out on top, as always.

It's just too bad we're gonna have to charge you extra for the added headache.

© 2009 The Epicurean Dealmaker. All rights reserved.

Weekend Math Lesson

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Sat, 13 Jun 2009 04:13:00 +0000

Try to imagine the awful meaning of this. You have often seen the sand on the seashore. How fine are its tiny grains! And how many of those tiny little grains go to make up the small handful which a child grasps in its play. Now imagine a mountain of that sand, a million miles high, reaching from the earth to the farthest heavens, and a million miles broad, extending to remotest space, and a million miles in thickness; and imagine such an enormous mass of countless particles of sand multiplied as often as there are leaves in the forest, drops of water in the mighty ocean, feathers on birds, scales on fish, hairs on animals, atoms in the vast expanse of the air: and imagine that at the end of every million years a little bird came to that mountain and carried away in its beak a tiny grain of that sand. How many millions upon millions of centuries would pass before that bird had carried away even a square foot of that mountain, how many eons upon eons of ages before it had carried away all. Yet at the end of that immense stretch of time not even one instant of eternity could be said to have ended. At the end of all those billions and trillions of years eternity would have scarcely begun. And if that mountain rose again after it had been all carried away, and if the bird came again and carried it all away again grain by grain: and if it so rose and sank as many times as there are stars in the sky, atoms in the air, drops of water in the sea, leaves on the trees, feathers upon birds, scales upon fish, hairs upon animals, at the end of all those innumerable risings and sinkings of that immeasurably vast mountain not one single instant of eternity could be said to have ended; even then, at the end of such a period, after that eon of time the mere thought of which makes our very brain reel dizzily, eternity would have scarcely begun.

— James Joyce, A Portrait of the Artist as a Young Man ¹

You can't see the stars in New York City. But you still have your imagination.

And James Joyce.

¹ James Joyce, A Portrait of the Artist as a Young Man. New York: The Viking Press, 1978, pp. 131–132.

© 2009 The Epicurean Dealmaker. All rights reserved.

Calling Cloud-Cuckoo-Land

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Fri, 12 Jun 2009 23:00:00 +0000

Tereus: "So why have you come here? What do you need?"
Euelpides: "To talk to you."
Tereus: "What for?"
Euelpides: "Well, you were once a man, as we are now.
You owed people money, as we do now.
You loved to skip the debt, as we do now.
Then you changed your nature, became a bird.
You fly in circles over land and sea.
You’ve learned whatever’s known to birds and men.
That’s why we’ve come as suppliants to you,
to ask if you can tell us of some town,
where life is sheepskin soft, where we can sleep."

— Aristophanes, The Birds

I suppose I do admire Evan Newmark on some level.

I mean, the former Goldman Sachs investment banker and current Mean Street commentator for The Wall Street Journal certainly sticks to his guns. Free markets, in his opinion, are the ne plus ultra for allocating and distributing economic goods, government interference in free markets is always and everywhere bad or doomed to failure, and government officials, while occasionally smart and/or well-intentioned, can't help but make things worse by their officious intervention. (Unless, of course, such officious, high-handed interference is directed by the former CEO of his previous employer, in which case he judges the man and his actions to be unqualifiedly "heroic.")

But on a more important level I find the man remarkably out of touch. To my experienced ear, he sounds like nothing so much as a throwback to another era, an investment banker of the 1990s and early 2000s who was raised, trained, and promoted in an industry environment which has gone the way of the Dodo bird. I find his fire-breathing defense of untrammeled markets and breathtaking sense of personal entitlement sort of charming, really, like an awkwardly posed sepia portrait from another age. It makes me feel warm and fuzzy inside, like any good piece of nostalgia.

But nostalgia usually makes for bad policy. And, in Mr. Newmark's case, some sadly risible commentary.

* * *

My thoughts turn this direction this afternoon in response to a piece Mr. Newmark penned concerning the appointment of Kenneth Feinberg as the Treasury's “Special Master of TARP Executive Compensation.”

Mr. Newmark does offer a couple nods to Mr. Feinberg's presumed intelligence and demonstrated experience in tackling thorny compensation issues. But he is skeptical that this experience will serve as adequate preparation for the task at hand:

Now, if there’s anybody who can figure this out, it should be Mr. Feinberg. He managed the unmanageable in his 33 months doling out $7 billion of the September 11th Victim Compensation Fund.

But setting pay for the TARP executives will prove much trickier than dispensing monies to the families of 9/11 victims. And that’s because — pardon my bluntness — the execs are living and the 9/11 victims were dead.

In the case of the 9/11 Fund, Mr. Feinberg applied a rigorous quantitative method to come up with a pretty generous payout to each victim’s family. It was largely a static calculation of an extraordinary, one-time payout.

Now, if Mr. Newman means to imply that having almost unlimited power to divvy up a fixed and unchanging compensation pool one time is an easier task than working with the management of TARP banks to set ongoing compensation for their executives, I have to say I agree with him. But that is a trivial and obvious point, and I do not think he means to limit himself to just that objection. He clearly thinks setting compensation for senior executives in the banking industry is a whole other order of magnitude more difficult than that.

He is supposed to determine “appropriate” pay — but good luck defining that.

Of course, Mr. Feinberg will try and come up with some formulas. But the permutations are endless. Look at all the differences in job responsibilities, titles, reporting lines and lines of businesses among the top 700 execs.

Then look at all the existing differences in the size and mix of compensation — the endless variations in salary, bonus, benefits, tenure, lockups, termination clauses, mixes of cash and stock and multi-year vesting schedules.

Finally, consider that this is annual compensation set in an ever-changing competitive marketplace for high-priced talent.

You see, Dearly Beloved: setting compensation for the most privileged and highly compensated executives of one of the most hated industries in America is so much more complicated than communicating the monetary value of a life to the very much alive and grieving relatives of a bunch of publicly lionized terror victims.

Notwithstanding whatever Mr. Newmark's personal experiences were in the conference rooms where he learned of his bonuses over the years, I can guarantee him there is no more fraught and potentially contentious conversation you can have than putting a dollar value on the violently extinguished life of a spouse or a child with that victim's family. And Mr. Feinberg apparently had both the good sense and the intestinal fortitude to come up with a compensation plan that took into account age, relative lifetime earning power, and other distinguishing characteristics, rather than taking the easy way out and paying the relatives of a widowed 63-year old janitor the same as the family of a 28-year old bond trader with a wife and three kids. I do not think Mr. Feinberg will have trouble dealing with complexity, differentiation, and nuance in his job.

And that's another thing. Why would Mr. Newmark assume that Mr. Feinberg plans to cram the endless variety of job function, profitability, and management responsibility among these investment banking executives into some sort of formula(s)? What is to prevent him from discussing, negotiating, and codifying some set of broad principles instead? It's not like he has been given a $7 billion pot of money which he has to allocate to the last penny among a fixed number of claimants, for pete's sake.

Measuring the effectiveness of investment banking management is just not that complicated, when you cut through the crap. You make money, you risk capital, you supervise people, and you build culture. With the potential exception of the last item, all these tasks can be measured pretty easily. So measure them, and pay based on results. Then, overlay on top of annual compensation the idea of deferred pay, which serves the dual function of aligning the manager's interests more closely with those of shareholders and other stakeholders and strengthening the manager's ties to that organization. Bingo. Two principles, six objectives. Simple. Job sorted.

The "endless" permutations and variations in responsibility and pay which Mr. Newmark cites as reason for the impossibility of Mr. Feinberg's task are just bullshit. That is the traditional perspective of a traditional investment banker, who has spent his entire career screaming at the top of his lungs how he is unique, how he is better than his peers, and how he goddamn well better be paid 100% more than the next highest paid guy or he's gonna walk out the door stat. Bullshit, bullshit, and more bullshit. Investment banking is a commodity business, and investment bankers are almost always nowhere near as special as they would like themselves or their compensation committees to believe. They make lots of money because they are in an industry which makes a lot of money. The problem is, they quickly begin to believe they make as much as they do because they are worth it, they are that good. It's like the entire industry is comprised of squeaky wheels constantly squealing for more grease.

* * *

You know who I bet is most looking forward to the arrival of Mr. Feinberg on their doorstep? TARP bank Executive Committees and Boards of Directors, that's who.

These are the people who have had to deal with these overbearing prima donnas for years, and I can guarantee you that nobody likes that job. Wouldn't top management just love being able to tell Mr. Big Swinging Dick that he can't have a compensation package that falls outside the rules Mr. Feinberg has laid down? I know I would. Sure, you might lose a few good bankers to Deutsche Bank, or some other empire-building pack of yahoos who think buying a few dozen high-priced investment bankers will get you up to the level of Morgan Stanley or Goldman Sachs in a couple years. But a) there aren't enough seats in the shrinking industry for all the would-be BSDs to fill anyway, and b) the empire-building yahoos never pose as much of a threat as you fear or they hope. They may make some money for a few years, but they almost never build a sustainable culture, and they usually end up losing their shirts and firing all the washed up rainmakers they poached from their betters. By that time, of course, the bank Mr. BSD jumped from has filled his seat with a younger, cheaper replacement who is just as effective.

There is nothing a negotiator likes more than having a credible excuse that his hands are tied when it comes to certain items. "Sorry, man, I'd love to give you a 1/16 share of the company jet as part of your package, but those government bastards just won't let me. [Snicker]"

And, like most of his former peers in the industry, Mr. Newmark seems to be unaware (or in denial) that most investment bankers are price takers when it comes to compensation packages. Only the top guys get any leeway in writing their own ticket. The rest of us get stuffed with complicated tranches of deferred stock and options, incomprehensible termination clauses, and unconscionable lockup provisions because that's what our employer offers. Any system which could help simplify industry pay practices would not only benefit employees mightily, it would reduce the enormous clerical and legal burden investment banks carry simply administering their boilerplate gobbledegook.

Lastly, for someone who is as fierce an advocate of free labor markets in banking as he is, Mr. Newmark seems to have surprisingly little faith in their robustness. Else, how can he claim that

on Wall Street, decisions at the top flow straight through to the bottom. Compensation is a pyramid. Start tinkering with the pay of the CEO and his lieutenants, and soon the pay of the vice-presidents and associates gets cut.

Uh, no. Even if there are explicit limits set on the pay of senior executives, why would the market laws of supply and demand automatically be repealed for lower level bankers not subject to constraints? It strikes me that Goldman Sachs and Morgan Stanley had better pay competitive market wages for their Analysts, Associates, Vice Presidents, and non-executive Managing Directors—no matter how few millions Lloyd Blankfein and John Mack take home—or their precious franchises will begin to wither away pretty damn fast.

I have no idea what plans Mr. Feinberg may have regarding his position, and what principles or rules he may or may not impose. His admirably rational conduct during the highly public, emotionally fraught process of compensating the September 11 victims gives me great comfort that he is neither a wealth-leveling redistributionist nor a wild-eyed socialist bent on destroying the banking industry. If, however, he intends to undertake what Mr. Newmark calls "the thankless and impossible task of replacing the free market," then he is indeed a fool sent on a fool's errand. I see no evidence of that, but we will just have to see.

In the meantime, the fact that what comprises "competitive" wages is declining in the banking industry has nothing to do with regulation, and everything to do with declining industry profitability. In other words: supply and demand. Evan Newmark should be proud.

* * *

Just for fun, I will leave you on a provocative note. Those free marketeers who have stuck with me this far have the opportunity to get even more riled up over the weekend.

I would not suggest that Mr. Feinberg or anyone else in the Obama administration has such intentions, but I would note that broad based compensation principles might be used in a larger policy context than simply palliating voter anger and (hopefully) mitigating excessive systemic risk. For instance, much has been made of the concept of banks which are considered "too big to fail." If, in fact, there is an urge to limit the size and systemic importance of any one financial institution in the marketplace, perhaps the concept of an industrywide salary cap is worth exploring. I think it would have to have some tie to industry revenues, since presumably no-one wants to limit those ex ante, but it should also be tied to profitability. I am sure there are all sorts of unintended consequences which could arise from such a policy—of which the devoted sports fans among my audience could no doubt enlighten me—but properly structured it might be a very neat way to let free market forces operate relatively untrammeled within the confines of overarching economic policy limits.

Consider: Instead of one Goldman Sachs, one Citigroup, and one Wells Fargo, we could have 50 or 60 little Salomon Brothers, Bank Ones, and EF Huttons. Just think of the sponsorship opportunities!

I encourage fans of Ayn Rand, Karl Marx, and the New York Yankees to discuss this amongst yourselves. I would be happy to join you, but I am afraid I have a previous commitment.

© 2009 The Epicurean Dealmaker. All rights reserved.

Hammer and Tongs

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 10 Jun 2009 22:30:00 +0000

Slumped by the courthouse
With windburned skin
That man could give a fuck
About the grin on your face
As you walk by, randy as a goat.
He's sleepin' on papers
But he'd be warm in your coat.

— Romeo Void, Never Say Never

The Supreme Court waved through the Administration's sale of Chrysler to Fiat today. For the moment, the pillars of the Republic seem to have withstood the blow. As of this morning, the secured lending market has completely failed to implode, and I am reliably informed that the sun ignored the hullabaloo and rose in the East according to plan. Meanwhile, all those wailing and gnashing their teeth these last few weeks about the onrushing juggernaut of creeping socialism and crypto-fascism seem to have swallowed their tongues and are busy inspecting their fingernails.

It is likely that this silence is simply a temporary reprieve, a pause for breath before the larger struggle looming over the reconstitution of General Motors. Call me naïve, but I would like to believe it also has some little relation to the fact that the conflict between government policy and the rights of private capital in this instance has had a full hearing under the rules set up by the Constitutional checks and balances of our tripartite political system. I also take comfort that the final decision not to forestall the Administration's actions came from a body of life-tenured jurists, none of whom owe their appointments or their ongoing authority to this selfsame Administration.

This will not satisfy the naysayers, however. I would be disappointed if it did. Genuine lawyers and law professors—as well as commentators whose credentials appear to have been gleaned from a cursory reading of Wikipedia or the Napoleonic Code—continue to differ on the legality of the methods the Administration used to rescue the automakers. I pretend no definitive expertise in this area. I will only note the oft-overlooked truism that our current legal system relies on opposing arguments by committed advocates to settle legal disputes. Said simply, lawyers argue. That is their job. They do not pursue some elusive and unchanging truth: they try to win.

Similarly, I have made the point before that dealmakers do not seek some elusive and unchanging truth about value, or its proper allocation among competing claimants: they negotiate. Strangely, this concept seems to be a difficult one for many people to grasp, even some who clearly should know better.

* * *

For what it's worth, I myself have severe doubts about the wisdom, sustainability, or eventual economic success of the Government's current attempts to rescue the US automaker industry. I tend to think it is bad economic policy. However, I also understand that economic policy is not what is driving the government's actions in this case. It is politics, pure and simple.

Preserving tens if not hundreds of thousands of jobs counts for a lot of votes in any Congressional or Presidential election, which is one very important reason why successive governments in this country—Republican, Democrat, and mixed—have not done more over the past four decades to fix the problem. Now that Chrysler and GM have driven themselves into a ditch, upside down with wheels spinning, I can only hope someone figures out how to prevent their rescue from becoming a permanent ongoing taxpayer-funded wealth transfer to the state of Michigan from the other 49.

* * *

There is a larger issue at hand, however.

As a theory of political economy and a socioeconomic ideology, financial capitalism is beating a hasty retreat all over the globe. The reasons for this should be clear: while it alone has not been responsible for all of the sources and effects of the late financial meltdown and the ongoing global recession, it certainly has taken a central role, and it has utterly failed to cover itself in glory during recent events. The countervailing forces of regulation, government control, and wealth redistribution have roused themselves from their long slumber, and they are both cranky and hungry. It would be hard to find anyone outside the cloistered confines of finance and investment who believes in free and untrammeled markets anymore.

More importantly, vast swathes of ideologically uncommitted citizens who were happy to drink the free market Kool Aid when it justified, encouraged, and helped pay for a standard of living they could not otherwise afford now view anyone from the finance sector with as much enthusiasm as a dose of the clap. The challenge for those of us who work in the ways and byways of the industry is that these former friends—added to the dyed-in-the-wool enemies of capitalism from the left and elsewhere—vastly outnumber our own relatively meager numbers. Politics, for those of you who need reminding, is definitely a numbers game.

I have argued elsewhere that the Administration's actions in ramming an accelerated sale of Chrysler down the throats of other creditors were not actually driven by a desire to change the rules of the game. I still believe this to be true, and I view both Chrysler and GM as special cases motivated by special circumstances which even the government has no intention of repeating. I could be wrong. Only time will tell.

But I may in fact be even less sanguine that some who have argued against me that the current rules of the game in our economy will remain unchanged. I believe there is great pressure from many quarters for a sustained reworking of the ground rules in this economy, with greater regulation, less financial freedom, and more equal distribution of wealth highest on the agenda. Equity, for a change, has come to replace efficiency as the most important god in our socioeconomic pantheon.

This is why I think the forces who are waging a rearguard action against what they see as unconscionable attacks by the government on (what they define as) the rule of law are completely missing the point. There is nothing fixed and immutable about the law, or its interpretation, or even the weight which a society gives to legal precedent in arbitrating important political and economic disputes. Law, and the rules of the game in general, are being reshaped as we speak. Nowhere is it written that they cannot be.

I stand with those who believe that both capitalism and democracy are each the least bad of a set of far worse solutions to organizing economic and political activity, respectively. But that does not mean that democracy and capitalism are completely compatible, or that they cannot become antithetical to each other under certain circumstances. We find ourselves in such circumstances now.

It is time for those of us who value both to stop whining about the good old days, engage with our critics, and help hammer out a new solution, before a new solution is hammered out for us.

I personally have no ambition to become an anvil or a nail.

© 2009 The Epicurean Dealmaker. All rights reserved.

These Dark Satanic Mills

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 03 Jun 2009 02:55:00 +0000

And did those feet in ancient time,
Walk upon Englands mountains green:
And was the holy Lamb of God,
On Englands pleasant pastures seen!

And did the Countenance Divine,
Shine forth upon our clouded hills?
And was Jerusalem builded here,
Among these dark Satanic Mills?

Bring me my Bow of burning gold;
Bring me my Arrows of desire:
Bring me my Spear: O clouds unfold:
Bring me my Chariot of fire!

I will not cease from Mental Fight,
Nor shall my Sword sleep in my hand:
Till we have built Jerusalem,
In Englands green & pleasant Land.

— William Blake, Preface from Milton: A Poem

"You never want a serious crisis to go to waste. What I mean by that is it's an opportunity to do things you think you could not do before."

— Rahm Emanuel, interview, November 19, 2008

As a young investment banker coming up in the business, I remember absorbing industry maxims on the knee of my superiors and mentors, like a wolf cub suckling at its mother's teat. Many of these had to do with what Martin Luther King called, in another context, the "fierce urgency of now:"

"Make hay while the sun shines."

"Strike while the iron is hot."

"Opportunity has a short shelf life."

and (my favorite)

"It's almost always better to make a good-enough decision now than a better decision two weeks from now."

Of course, these maxims make sense in investment banking, where the pace of activity varies unpredictably between mind-numbing stretches of utter boredom and frantic, 72-hour sprints of panicked frenzy. Investment banking is a cyclical business, and windows of opportunity, for both capital markets and M&A, come at unpredictable intervals of uncertain duration. If you want to make money, you work like mad when there is work to do and chew your fingernails when there is not. Drycleaning, proper nutrition, and marital harmony be damned.

Being investment banking maxims, these clichéd little nuggets are also self-serving in the extreme. We always urge our clients to do the deal now: before the market window closes; before their competitors catch wind of their actions; before our engagement letter expires. It is always easier to convince a client to act when the pressure of opportunity or of events is plain for all to see. It takes a consummate salesman—and the right set of supporting circumstances—to get the client to commit when the proximate reasons to act are invisible to all but the investment banker.

For let us not kid ourselves. The decisions an investment banker encourages his client to take, and the actions he helps him complete, are almost always fraught with significant peril, as well as potential reward. Capital raising can go bad, due to general market swoons or issuer-specific calamities, and an M&A deal can devolve into a mud-splattered clusterfuck before or after the closing documents are signed. While the deals investment bankers do are routine to them, the clients for whom an IPO, a bond offering, or a sale or acquisition are not life altering events are few and far between. Every CEO who is not an incompetent yahoo has second thoughts, and it is the banker's job to stiffen the CEO's spine and polish his wingtips for the Monday morning speech announcing the deal to the Street.

Inertia is strong, O Dearly Beloved, and the temptation to leave well enough alone, to tinker around the edges of a problem rather than confront it head-on and tear it out by the root, is a universal human inclination. When a client finally decides to do something requiring our help, it is an investment banker's job not only to do the damn thing, but also to make sure our precious client does not chicken out. In such situations, I always find it helpful—if not a damn precondition—to have a conveniently looming crisis to point to as further spur to taking the irrevocable plunge.

* * *

All of which is to say that I agree wholeheartedly with President Obama's Rottweiler Rahm Emanuel that it would be shame to let the current crisis in our financial system go to waste, and not confront the hairy problem of reforming the financial regulatory system head on.

The mainstream media is full of stories outlining, in nauseating detail, the expanding dimensions of just exactly how fucked up our financial regulatory system was and is. The SEC is an understaffed, woefully overmatched collection of good-hearted nebbishes who have neither the skill, experience, nor political support to monitor the sharks on steroids nominally under their supervision, much less investigate and prosecute misbehavior if and when they find it. The rules they impose on capital markets and investment banking are not only laughably inadequate to the task of regulating the new markets and new securities which have sprung up in the 75 years since they were first written, but also ludicrously bureaucratic and nitpicking on the historical industry practices they do recognize.¹

The ongoing existence of the SEC, which supposedly regulates securities, and the CFTC, which supposedly regulates derivatives and other financial investments, as separate entities has no ready explanation other than bureaucratic inertia and political turf wars in Congress. As a secondary notion, the idea of merging these two entities makes eminent sense, assuming, of course, one discards the best solution, which would be to burn each of these monuments to ineptitude to the ground and salt the earth they stand upon.

Meanwhile, the cleverboots in the banking industry have already picked themselves up and dusted themselves off from the 50-car pile-up they drove the economy into. They are sending an army of lobbyists and campaign contributors into the halls of power to make sure any new rules imposed on them are both toothless and rigged in their favor. Congressmen and -women, most of whom couldn't balance a checkbook if you gave them a fucking jeweler's scale, are no match for smooth-talking operators purring about the need to preserve "innovation" and "efficiency" in the market. This is not even to mention the inevitability of regulatory capture, when underpaid government bureaucrats try to supervise their former and future private sector employers who make, on average, about fifty gazillion times more money than they do.

So I am with Bob Teitelman, who worries that all this CNBC advertising budget-driven drivel about "green shoots" in the economy is letting a once-in-a-generation opportunity to craft a robust, long-lasting regulatory regime for the new financial reality slip away, and against those who urge slowness and caution. These latter argue that we should not rush into anything, since we are likely to make mistakes in forming a new regulatory system in haste, and generate all sorts of unintended consequences.

I say fuck it. Kill 'em all and let God sort 'em out. Wipe the slate clean and start over with some broad principles and some smart, well-paid technocrats and ex-investment bankers who can figure it out on the fly. Let them hire killers and mercenaries who are smart enough not only to enforce existing rules, but also anticipate those areas and practices that will require regulation in the future. How do you think the financial sector itself manages its own business?

Let us not forget that the perfect is the enemy of the good. And let us not kid ourselves that we have any chance whatsoever of creating a "perfect" regulatory system. This is an ongoing project, people: we will be allowed to remodel. The point is to get started now.

I do not expect a New Jerusalem on Wall Street. But I sure as shit would like to see something better than a Motel 6.

¹ Explain to me, for example, why an M&A banker selling a corporate division of General Electric Corporation to private equity titan The Blackstone Group—two of the most sophisticated institutional entities you can possibly imagine—is subject to the same registration and reporting requirements as a stockbroker selling variable annuities to Aunt Millie in Little Rock, Arkansas. One-size-fits-all broker dealer requirements are a historical anachronism as well as a fucking travesty.

© 2009 The Epicurean Dealmaker. All rights reserved.

Take Home Quiz

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Fri, 29 May 2009 22:22:00 +0000

May 29, 2009
ECON 403: Elements of Modern Corporate Finance Theory
Section 4.2: Valuation

Please answer the following questions using the methodology we have been employing in this course. Make sure to show all your work. The use of financial calculators is strongly encouraged.

You may use the attached materials as examples.

1) What is the Net Present Value of a poem?

2) What is the Internal Rate of Return on a photograph?

3) What is the proper Debt to Capital Ratio for a concerto?

4) What is the Net Operating Cash Flow of a painting?

5) Extra Credit: To what reasons does the author of the following passage ascribe the collapse of Lehman Brothers in September 2008? Is he using Fama and French or Miller and Modigliani? Explain.

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.
Through the unknown, remembered gate
When the last of earth left to discover
Is that which was the beginning;
At the source of the longest river
The voice of the hidden waterfall
And the children in the apple-tree
Not known, because not looked for
But heard, half-heard, in the stillness
between two waves of the sea.
Quick now, here, now, always—
A condition of complete simplicity
(Costing not less than everything)
And all shall be well and
All manner of thing shall be well
When the tongues of flame are in-folded
Into the crowned knot of fire
And the fire and the rose are one.

— T.S. Eliot, Little Gidding (excerpt)

This quiz will count for 25% of your semester grade. Good luck!

© 2009 The Epicurean Dealmaker. All rights reserved.

Old Ideas Are the Best Ideas

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Thu, 28 May 2009 16:30:00 +0000

I have been accused, from time to time, by otherwise Grateful Readers of these pages of focusing overmuch on the description, analysis, and criticism of many of the troublesome practices and behaviors in the financial industry which vex our peaceful commonwealth and which have led us down a ruinous path to our current sorry state. "Why," these plaintive supplicants beg, "does someone with your blinding grasp of the obvious not do your fellow citizens the signal service of providing a solution to the pesky problems you so trenchantly describe, rather than just ranting on and on about their vileness and injustice?"

This, I must admit, is a just critique.

Fortunately, a recent browser in my archives has reminded me of a piece I penned quite early in my career as a gimlet-eyed commenter on current events. While it is not entirely up to date, it could easily be refashioned to do service in today's less carefree environment. I wrote the post in question early in 2007, when I was yet a starry-eyed naïf on the serried field of financial bloggism, and when nary a cloud bedimmed the bright blue horizon of a world where everyone looked forward to an endless future of easy credit, excess liquidity, and consistently above-market returns.

The mere memory of those times makes me sigh.

Anyway, as I said, the post could do with some editing for fact and content, since some of its key premises—for example, the contention that private equity firms still have money to spend—are clearly artifacts of a time long since past. (Now, for instance, one might contend that the natural buyer is the US government, financed without apparent limit by complaisant taxpayers and clueless sovereign wealth funds. Stay tuned for further revisions.)

Nevertheless, I believe the problem I identified then continues to afflict us now, and the solution I proposed remains sound. Perhaps it could be extended to a broader class of commodities—for example, investment bankers, secured debt lenders in distressed companies, and reckless insurance company executives—but I will leave that as an exercise for the reader. When purveyors of pitchforks and torches struggle to meet demand from the general populace for their wares, I am certain that a well-thought-out, rationally designed solution along the lines of my proposal will meet with substantial public acclaim.

* * *

So, without further ado, I (re)present herewith

A MODEST PROPOSAL

FOR PREVENTING THE CHIEF EXECUTIVE OFFICERS OF PUBLIC CORPORATIONS FROM BEING A BURDEN TO THEIR SHAREHOLDERS OR COUNTRY, AND FOR MAKING THEM BENEFICIAL TO THE PUBLIC ¹

IT IS a melancholy object to those who walk through this great town or travel in the country, when they see the streets, the roads, and expensive restaurants, crowded with former Chief Executive Officers of public companies, followed by three, four, or six hangers-on, consisting of PR flacks, personal trainers and bodyguards, and second or third wives, all in furs and importuning passersby for the location of Charlie Rose's studio. These ex-CEOs, instead of being able to work for their honest livelihood, are forced to employ all their time in playing the 100 Best Golf Courses in the World, yachting in the New Hebrides, and giving interviews on "Larry King Live." Worse, they are routinely compelled by their straitened circumstances to author self-exculpatory autobiographies and tendentious management screeds (with the assistance of ghostwriters or third wives) and to promote same on nationwide speaking tours.

I think it is agreed by all parties that this prodigious number of former CEOs is in the present deplorable state of the nation a very great additional grievance; and, therefore, whoever could find out a fair, cheap, and easy method of making these individuals sound, useful members of the commonwealth, would deserve so well of the public as to have his statue set up for a preserver of the nation.

But my intention is very far from being confined to provide only for former CEOs; it is of much greater extent, and shall take in the whole number of current and former Chief Executive Officers of publicly traded corporations in this country and, by extension, the world.

The number of public company CEOs in this nation being usually reckoned five thousand, of these I calculate that there may be about fifteen hundred of consequence. The latest research by eminent scholars of executive pay indicates that these CEOs were paid an average of $4.9 million a-piece per annum in wages, benefits, and emoluments, thereby imposing upon the nation and upon the common shareholders of their employer companies an aggregate burden of $7.4 billion per annum. And yet this is not the worst of the imposition upon the population, since it is common for such CEOs to take with them substantial multiples of their current pay and benefits upon their retirement, voluntary or otherwise, from the post. A respected gentleman of my acquaintance, who himself is of the most unimpeachable character and honesty, even asserts that there have been some knaves and scoundrels among the ranks of former CEOs who have managed to depart their employers with amounts in excess of $200 million, although I can scarce credit such outlandish reports.

I shall now therefore humbly propose my own thoughts, which I hope will not be liable to the least objection.

I have been assured by a very knowing Frenchman of my acquaintance in New York, that a vigorous healthy CEO well compensated is at three years old a most delicious, nourishing, and wholesome food, whether stewed, roasted, baked, or boiled; and I make no doubt that it will equally serve in a fricassee or a ragout.

I do therefore humbly offer it to public consideration that of the fifteen hundred current CEOs already computed, those five hundred CEOs in their first year and those five hundred in their second year of service may be reserved for ongoing management, and five hundred CEO designates be identified for promotion to the post. The remaining five hundred currently in office may, upon the third anniversary of their employment as CEO, be offered in sale to the persons of quality and fortune though the nation; always advising the shareholders to let them suck plentifully at the corporate teat in the last fiscal quarter, so as to render them plump and fat for a good table. A CEO will make at least six dishes at a lavish entertainment for friends; and when the family dines alone, the fore or hind quarter will make a reasonable dish, and seasoned with a little pepper or salt will be very good boiled on the fourth day, especially in winter. I have reckoned upon a medium that a CEO newly appointed will weigh 190 pounds, and in three solar years, if tolerably remunerated with salary, options, restricted stock, and perquisites, increaseth to 260 pounds.

I grant this food will be somewhat dear, and therefore very proper for private equity partners, who, as they have already devoured most of the public corporations, seem to have the best title to the CEOs.

...

* * *

There is more, Dear Readers, much more. Please, read it at your leisure and discuss it amongst yourselves.

I pass these valuable thoughts on to you, my fellow citizens, as a general salve for these troubled times with no thought of personal reward, other than the cheers and praise of a grateful nation.

(Of course, donations to The Epicurean Dealmaker Memorial Library are always welcome. Please send all contributions to the address found on this website in the form of small, unmarked bills or credit vouchers to nationally recognized strip clubs. Thank you.)

¹ As before, this author proffers fulsome apologies to Jonathan Swift.

© 2009 The Epicurean Dealmaker. All rights reserved.

Obviously, Alan Blinder Is Not a Golfer

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Thu, 28 May 2009 14:54:00 +0000

Oh, Alan, Alan, Alan.

I love ya dearly, but clearly you need to get out more. Get a cup of coffee, see a movie, read a blog or two for chrissakes.

Despite the vast outpouring of commentary and outrage over the financial crisis, one of its most fundamental causes has received surprisingly little attention. I refer to the perverse incentives built into the compensation plans of many financial firms, incentives that encourage excessive risk-taking with OPM—Other People's Money.

What, you say, hasn't huge attention been paid to executive compensation—especially those infamous AIG bonuses? Yes. But the ruckus has been over the generous levels of compensation, or the fact that bonuses were paid at all, not over the dysfunctional incentives that inhere in the way many compensation plans are structured.

Well, I don't know. This guy seems to have been paying attention.

In fact, I might even say he has been beating the dead horse of perverse incentives in the finance sector rather convincingly for some time now.

Oh well, I guess there's no accounting for taste.

© 2009 The Epicurean Dealmaker. All rights reserved.

Life Imitates Art

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 27 May 2009 22:35:00 +0000

This is my new favorite explanation for the complete and utter collapse of financial capitalism as we know it:

In the world of comic books any individual who has more than 5 million dollars in saving or assets immediately becomes bat-shit insane. It's a strange rule, but it seems that every independently wealthy individual in superhero comics decides that fighting/committing crime is the best way to spend their free time. They ignore possible hobbies like golfing, yachting, and collecting antique cars and go straight into wearing a mask and creating a global organization designed to save/destroy/conquer the world. The examples in comic book fiction are nearly limitless.

...

This persistent pattern of a wealthy individual building a financial empire through shrewd economic skill and then destroying it almost instantly through costumed antics shows only one thing. In comic books, all money is coated with a powerful hallucinogen. When you aquire enough of it you go crazy and then act accordingly.

So far, the authors have been too modest in assessing the explanatory power of their groundbreaking new theory by limiting it to the comic book universe, but I am sure a book deal or two and a couple of appearances on CNBC and Charlie Rose will cure them of their diffidence posthaste. If not, I know a couple of Ukranian hookers who can buff their confidence to a blinding shine.

Coincidentally, I already possess warehouses full of documentation proving that anyone in the real world who accumulates more than $5 million in wealth automatically and immediately turns into a raving lunatic. It just never occurred to me that we could have avoided global financial meltdown by distracting investment bankers and commercial bank CEOs with a lifetime supply of green spandex and a few hundred crates of pumpkin bombs.

Hindsight, as they say, truly is 20-20. Or, in this case, X-ray vision.

Hat tip: Felix Salmon

© 2009 The Epicurean Dealmaker. All rights reserved.

Précis

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 27 May 2009 01:35:00 +0000

A good guide will take you through the more important streets more often than he takes you down side streets; a bad guide will do the opposite. In philosophy I'm a rather bad guide.

A serious and good philosophical work could be written consisting entirely of jokes.

— Ludwig Wittgenstein

Illustration courtesy of xkcd.

© 2009 The Epicurean Dealmaker. All rights reserved.

My Kid Could Do That!

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Tue, 26 May 2009 18:32:00 +0000

In a flash bulletin this morning from The Department of the Obvious Department—otherwise known as The Wall Street Journal—I was gobsmacked to learn that a crack team of Harvard and NYU academics has cracked the code to M&A valuations.

As I hastily toweled coffee off my keyboard and computer monitor, it occurred to me that, if said news were true, it could revolutionize the practice of corporate mergers and acquisitions, not to mention put a serious damper on my plans for early retirement to the Côte d'Azur with a couple hundred large and a stable of pliant young confidential secretaries. Naturally, I read the article with bated breath.

Having read the piece, however, I am pleased to report that investment bankers, private confidential secretaries, and French Riviera purveyors of vintage champagne, high-priced real estate, and paid police protection can all heave a gratified sigh of relief. There is nothing to see here. Move on, folks.

Of course, there will always be some number among my Worshipful Audience who will affect a slightly more skeptical air and demand to know names, dates, and the particular measurements of any confidential secretaries involved. For these tiresome busybodies, I will take valuable time away from my Tuesday afternoon pedicure to make the following remarks.

* * *

Sadly, the concierge for this little spectacle, the WSJ's own Dennis Berman, did not link to the original report by our intrepid researchers, so your Dedicated Bloggist is limited to commenting on the news article alone. Fortunately, there is adequate supply of folly in said piece to provide ample amusement for all.

For instance, Mr. Berman opens his piece with a sop to the cheap seats, taking a swipe at the supposed hypernumeracy of the media's current favorite whipping boys:

With their spreadsheets and teams of math geeks, investment bankers like to show their deal work as a kind of deep science.

While pithy and provocative, this little dig suffers from the slight rhetorical handicap that it simply is not true.

First of all, the mathematics used in M&A valuation, while admittedly more complicated than balancing the average American's checkbook, is decidedly not complex and bears absolutely no resemblance to the scary agglomerations of obscure Greek letters, self-referential operators, and nested gobbledygook in which the true "math geeks" of the investment banking world—derivatives structurers and traders—traffic. Sure, there is the all-important concept of the time value of money, the calculation of which is best handled within the confines of a computer spreadsheet, but most M&A valuation entails simple grade school math: addition, subtraction, multiplication, and division.

Second, any M&A banker worth his or her salt knows that valuation is an art, not a science. There is no one right answer to the valuation of anything as complex as a business. For one thing, while the mathematics of the relatively simple models investment bankers traditionally use to value companies—comparable company trading multiples, comparable transaction multiples, and discounted cash flow projections—are uncontroversial, their input assumptions are not. Which publicly traded companies do you designate most comparable to the firm you have on offer? Which valuation multiples do you weight most heavily in deriving an "appropriate" public valuation? Which M&A transactions do you pick to compare the proposed deal to, and why? Which discount rate do you use for your discounted cash flow analysis of the company's projected future results? What is the basis for the operating assumptions which underly those projections? Etc., etc.

Every single one of the important assumptions an investment banker makes in his or her valuation of a company can and will be challenged by the banker on the other side of the table. And this conflict over assumptions does not spring solely from the antagonistic positions the opposing bankers hold as advocates for their different clients. Even among bankers on the same side of a deal, honest disagreements can arise over the proper assumptions to make. Valuing a company is not like solving the Pythagorean theorem: there is no one right answer.

Given this, and given the competing objectives of the parties to a deal, it is clear that the determination of "value" in an M&A transaction—the purchase price to be agreed upon—is driven not by the unchanging precepts of cold, emotionless science or mathematics. It is determined by negotiation.

M&A bankers know this. I have written so, at length, before:

There is no "right" number in merger negotiations, just as there is no one, right number in valuing any for-profit enterprise. Valuation, whether in the market or in a deal, is well and truly—and ineluctably, now and forever—an art, not a science. But such gut instincts—rather more accurately described as carefully considered judgments—on the part of M&A advisors are or should be based on a mountain of careful, well-judged analysis, comparison, and argument. You never go to your counterparty in an M&A deal and say your offer of $100 million for his pissant company is based on gut instinct; you give him reasons. You show him where his company's peers are trading in the marketplace, you show him the levels at which other companies in his industry have been bought and sold, and you share your assumptions of the future value of his business enterprise with exhaustively analyzed and justified discounted financial projections. He, if he is not an idiot, will counter with his own exhaustive analysis showing why his gem of a company is really worth $500 million. And you're off to the races.

Therefore, I find Mr. Berman's transparent attempt to criticize an M&A straw man made up of imagined scientific rigor from the perspective of behavioral economics flatly unconvincing.

In other words, boards and bankers are just like the rest of us. They set aside their rational mind in favor of those anchors -- arbitrary and emotional points of concentration. It's the same process that we use when ordering dinner at a restaurant: That $50 steak can influence how we perceive the $25 chicken.

Of course M&A is subject to all sorts of emotional and psychological quirks. What person who actually does M&A for a living ever said it wasn't?

* * *

For another thing, I find the article's purportedly dramatic conclusion that there is a surprisingly high correlation of completed merger prices with the 52-week high stock price of the target company seriously underwhelming, on many levels.

First, there is the question as to whether Boards of Directors and investment bankers are in fact "fetishistic" about it:

The 52-week high stock price has always had a fetishistic role in merger discussions. By custom, boards are insulted if a merger offer doesn't breach this price level. Banker presentations focus on whether an offer is greater or lower than the 52-week high.

Well, look at it this way. The 52-week high, by definition, shows a demonstrable, concrete valuation for the target company, one validated in the public market sometime within the past year. It is a "real" price that directors can point to easily, unlike the smoke and mirrors valuations based upon a mountain of assumptions which their investment bankers assault them with in the boardroom. It is a price the other side cannot reasonably dispute. It is a clear, unequivocal, publicly-available reference point which the Board can direct their shareholders to, without making Aunt Millie or Cliff Asness dig through a 500-page proxy statement to find it. As anchors go, it is a damn convenient one: good, solid, and indisputable.

Second, unless the company has fallen on seriously hard times, or its directors believe its future prospects have been permanently impaired, their default starting point should be that they will not consider selling the company for anything less than a premium to the 52-week high. After all, even if the company is not trading at that level, it was worth that much less than a year ago (see above), and generally accepted corporate finance theory contends that an acquirer should be willing to pay a premium to the publicly-traded price of a widely held company to reflect the value of control for that asset. Therefore, it strikes me as no great surprise that the 52-week high holds such attractive power when it comes to M&A transactions.

The academics' study itself supports this idea with some rather unsurprising results of its own, results which Mr. Berman oddly chooses to characterize as "oddities":

Consider these oddities. More deals priced at exactly the 52-week-high than at any other price. About three-fifths of deals fall above the 52-week marker. And each deal that is priced above the high has a 76% chance of shareholder approval, while deals falling below the high succeed 69% of the time.

What's odd about any of this? (In particular, I fail to get excited that exactly 60 out of 7,500 transactions studied show final prices equal to the target's 52-week high, more than any other price. Sixty out of 7,500? Stop press!) Almost none of these results are remotely odd if you consider that there are probably tons of offers to purchase companies at prices well below their 52-week highs where Boards of Directors politely tell the suitor to go pound sand before the deal is even announced. Hostile suitors, of course, can announce offers well below their targets' highs, but such deals remain a substantial minority among all M&A deals even today.

Frankly, I find the study's results rather reassuring that Boards of Directors may in fact be less driven by emotion and unexamined behavioral tics than the authors seem to conclude. The mere fact that 69% of announced deals priced below the 52-week high water mark actually close demonstrates to me that directors (and shareholders) can make economically rational decisions quite often. For all the reasons the 52-week high acts as a positive benchmark for the selling company in negotiating a deal, it also imposes an extra burden on the selling company's directors to explain and justify the sale of the company for less to their shareholders and the market. I find the fact they pull it off more than two thirds of the time somewhat of a minor miracle.

* * *

For all this, there may actually be something there there. One could perform an interesting analysis with the professors' data that looks at anchoring around the 52-week high during different market environments. In particular, I would expect the correlation to be stronger—the 52-week high to be a stronger anchor to final pricing—during sellers' markets, when the selling company arguably has the upper hand in negotiations, and weaker during buyers' markets. Our intrepid academics would have to fine grain their analysis much more than their base period of 1984 – 2007 to pick up those patterns, though.

In the meantime, I would urge you to heavily discount the article's suggestion that anyone can take this study and go do M&A.

You don't need Goldman Sachs to do this math. Dr. Phil will probably do the trick: If you want to get a deal done, beat that 52-week-high. "These are the largest transactions that take place in the economy. If there's any place where psychology should be absent, it's here," said Mr. Wurgler. "But it's not."

Dr. Phil might actually be an asset at the negotiating table, but I guarantee you that completely clueless ivory tower M&A virgins like Professor Wurgler would not.

If there is any form of economic transaction where psychology does and must take center stage, large scale corporate M&A is it.

© 2009 The Epicurean Dealmaker. All rights reserved.

Psycho-geography

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Fri, 22 May 2009 01:24:00 +0000

Pfuel was one of those hopelessly and immutably self-confident men, self-confident to the point of martyrdom as only Germans are, because only Germans are self-confident on the basis of an abstract notion—science, that is, the supposed knowledge of absolute truth. A Frenchman is self-assured because he regards himself personally, both in mind and body, as irresistibly attractive to men and women. An Englishman is self-assured, as being a citizen of the best-organized state in the world, and therefore as an Englishman always knows what he should do and knows that all he does as an Englishman is undoubtedly correct. An Italian is self-assured because he is excitable and easily forgets himself and other people. A Russian is self-assured just because he knows nothing and does not want to know anything, since he does not believe that anything can be known. The German's self-assurance is worst of all, stronger and more repulsive than any other, because he imagines that he knows the truth—science—which he himself has invented but which is for him the absolute truth.

— Leo Tolstoy, War and Peace ¹

Here's a fun new parlor game, kiddies. Match the famous Russian novelist's national psychological stereotypes from 200 years ago to current financial market participants. Here are some thoughts off the top of my head:

Frenchmen = Investment bankers; recent MBA graduates
Englishmen = Goldman Sachs employees; private equity professionals
Italians = Hedge fund managers; CNBC commentators
Germans = Economists; derivatives structurers

Naturally, I exclude the Russians from my analysis, because I am completely unaware of anyone currently operating in the financial sector who will admit to knowing nothing, much less take pride in it. (Actually knowing nothing does not count, since if we used that distinction 98.3% of all market participants would have to start wearing ushanki all year round.)

Your thoughts?

¹ Leo Tolstoy, War and Peace. New York: Simon & Schuster, 1970, p. 709.

© 2009 The Epicurean Dealmaker. All rights reserved.

The Ant and the Elephant

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 20 May 2009 20:02:00 +0000

PARENTAL ADVISORY: This post contains naughty language and inappropriate situations. It is not suitable for a family blogsite. Fortunately, you are not reading a family blogsite.

Once upon a time, a small ant was walking along a forest path in deepest, darkest Africa. The ant was searching for a new colony to join, because his fellow ants at the colony where he was born had kicked him out the day before. The ant was in a foul and fractious mood.

It seems that our diminutive hero had developed a reputation for arrogance, conceit, and self-confidence all out of proportion to the meager contributions he made to his colony's welfare. He irritated all and sundry with repeated demands for honors, special treatment, and extra rations based upon his inflated sense of self worth. The ant's conceit and arrogance were only matched by the disdain he heaped upon the other, "inferior" ants in the colony, who suffered from the apparently unpardonable sin that they were not him.

The last straw for the colony elders came the day he claimed credit for a brief rain shower which brought welcome relief to the drought-parched surroundings. The elders were unmoved by his increasingly strident assertions that he alone had summoned the shower by doing a particularly energetic and skillful waggle dance. They knew, of course, that rain only fell when the Great Anteater in the sky relieved himself. They escorted him out of the colony that very evening.

The next day, as the ant stumbled blindly along the woodland path, bemoaning his fate and cursing the shortsightedness and stupidity of the elders who had been too moronic to see just how special and deserving he was, he was brought up short by a strange sound.

Looking up, he was surprised to see a large female elephant sitting smack dab in the middle of the path, blubbering inconsolably and waving one of her front feet around. The ant stopped in a huff.

"Look. Do you mind moving out of the way?," he snapped. "I am a very important ant, and I am in quite a hurry to get down this path."

"Oh please, Mr. Ant," begged the elephant, "please can you help me? I stepped on a tiny thorn a ways back, and it has worked its way into my foot. It is too small for me to see or get out, but it is simply killing me. I just can't walk any farther. Do you think you could take it out for me?"

The ant was unmoved. "I'm sorry, but I just don't have the time. I must ask you to move aside."

"Oh please, please, kind ant," the elephant pleaded, "I am sure you could take it out in no time. There," she indicated where the thorn was embedded, "you see? It would be no trouble for you at all. I would be so grateful."

"Oh you would, would you?," mused the ant, calculating to himself. "Just how grateful? How would you pay me back?"

"I would do anything for you, anything at all," she averred.

"Anything?"

"Yes, absolutely anything!"

"Okay," smiled the ant, "I want to fuck you in the ass."

"What?!," exclaimed the elephant.

"I want to fuck you in the ass."

"You're kidding me, right?," said the elephant. "That's a joke."

"No, I am absolutely serious. If you want me to help take that thorn out of your foot, a difficult and dirty job which will seriously inconvenience me and entail an unconscionable delay to my exceedingly important errand, then I expect to fuck you in the ass. Take it or leave it."

The elephant peered at the tiny ant, whose miniscule thorax was puffed up with self-importance, and back at her swollen, throbbing foot. "Oh, alright," she sighed, "do whatever you want. Just take out the damn thorn."

The ant laid down his little rucksack with a pleased expression on his face, and set to work removing the thorn. It was indeed a difficult and dirty job, but the ant worked diligently and eventually removed it. The elephant shuddered with relief and stood up to test her weight on the wounded foot.

"Okay," said the Ant, wiping his hands on a nearby leaf, "bend over."

"What?," asked the elephant.

"Bend over. I'm going to fuck you in the ass now."

"Oh, right," sighed the elephant. "Well, go ahead and climb on up there, Lothario. Just get it over with."

"I have to warn you," the ant announced smugly as he climbed the elephant's rear leg toward his destination, "that I am known among my own people as an exceptionally well-endowed ant. I fear that you will not find the sensation pleasant," he leered.

"Whatever," the elephant replied, as she peered at the tiny speck crawling up her leg. "Give it your best shot, big guy."

The ant placed himself in position and started banging away, encouraging himself with cries of "Go, Ant! Go, Ant!," and occasional taunts to the elephant to ask her how it felt to be dominated by such a puissant lover. The elephant, who could not feel a thing, ignored the ant and busied herself by considering where she would eat on her way back home.

Meanwhile, up in the forest canopy, a solitary monkey had silently witnessed this entire scene. Dumbfounded amusement had gradually led to helpless hilarity, and the monkey struggled to contain his laughter at the ludicrous scene below. As he writhed and twisted with silent guffaws, the monkey dislodged a large seed pod he had collected in the branches, and the heavy pod came tumbling down onto the unsuspecting elephant's head.

"Ow!," exclaimed the startled elephant. "That really hurt!"

"Yeah!," screamed the ant, in the extremity of his passion. "Take it, bitch!!"

* * *

Later, no amount of exasperated explanation from the elephant or strangled giggling from the helpless monkey could convince the ant that he himself had not caused the elephant's discomfort through his own exertions.

The incident had an unsurprisingly salutary effect on the ant's self regard, and it imbued him with such self-confidence and such a compelling story to tell that he was promptly crowned king of the next ant colony he encountered. After a long and lucrative career as a tyrant, the ant lived very comfortably in retirement on the speaking fees and book deals he was able to garner on the basis of his adventures. Later, the ant embellished his rather slender repertoire by doling out opinions on pachyderm podiatry, interspecies sex, gravitational acceleration of seed pods from the forest canopy, and other topics which a neutral observer might expect him to know little about.

The elephant, who might have told a different story to interested listeners, sadly fell into a poacher's trap a week after the incident and was butchered for her ivory.

The monkey, who could have corroborated the elephant's story, choked to death a month later on another seed pod in the middle of a fit of laughter brought on by remembrance of the story.

The ant, however, lived happily ever after, to universal admiration and acclaim.

* * *

MORAL: Never underestimate the ability of a self-absorbed egomaniac to make a career out of a couple of lucky breaks. (Especially if he is willing to fuck a few people in the ass.)

COROLLARY: There is no justice in the world.

DISCLAIMER: No ants, elephants, monkeys, or seed pods were harmed in the writing of this parable. Resemblance to any characters or situations living or dead is purely unintentional and entirely coincidental. The author of this parable disclaims any and all responsibility for these words, and maintains steadfastly that it was not he who mailed Jack Welch that parcel full of monkey poop a week ago Thursday. Hyperlinks which may or may not be embedded in this article are entirely the result of random computer error. The reader is encouraged to draw his or her own conclusions.

© 2009 The Epicurean Dealmaker. All rights reserved.

More of a Kickin' Sitcheyation

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Tue, 12 May 2009 00:54:00 +0000

Pappy O'Daniel: "I signed that bill. I signed a dozen aggeyculture bills. Everyone knows I'm a friend of the farmer. What I gotta do, start tendin' livestock?"
Junior O'Daniel: "We can't do that, Daddy. We might offend our constitchency."
Pappy: "We ain't got a constitchency! Stokes got a constitchency!"
First aide: "Well ... it's a well-run campaign. Midget and broom an' whatnot."
Second aide: "Devil his due."
First aide: "Helluvan organization."

Junior: "Say, I got an idee."
First aide: "Whassat, Junior?"
Junior: "We could hire us a little fella even smaller than Stokes's."
Pappy: "You slump-shouldered sack o' guts! Why, we'd look like a bunch of Johnny-come-latelies. Braggin' on our own midget. Don't matter how stumpy. An' that's the goddam problem right there. People think that Stokes got fresh ideas. He's au courant and we're the past."
First aide: "It's a problem of ... uh ... uh ..."
Second aide: "Perception."
First aide: "At's right."
Second aide: "Reason why he's pullin' our pants down."
First aide: "Gonna paddle a little behind."
Second aide: "Ain't gonna paddle it. Gonna kick it. Real hard."
First aide: "No, I believe he's gonna paddle it."
Second aide: "I don't believe that's a proper description."
First aide: "Well, that's how I'd characterize it."
Second aide: "I believe it's more of a kickin' sitcheyation."

— O Brother, Where Art Thou?

After several days of holding my peace and refusing to engage in a pointless pissing match with spokespeople for the militant wing of the Salvation Army, the card-carrying socialists at The Wall Street Journal have rallied to my rescue. Today they published a page one article which described exactly what happened during the negotiations over debt recovery before and during the Chrysler bankruptcy. I am pleased to report, Dear Readers, that their investigation has thoroughly confirmed the argument I made in these pages over a week ago.

Attentive readers will remember that I asserted several substantive points¹ in my tirade. First, the negotiations over debt recovery by Chrysler's secured lenders in the company's restructuring were just that, negotiations, not a cookbook allocation of value according to rigid, unvarying legal precedents. Second, while acting unequivocally like the schoolyard bully throughout, the Obama Administration did nothing fundamentally wrong or even unexpected by pushing hard to further its own political objectives. It certainly did not run roughshod over the rule of law or undermine the bankruptcy process, as some wilder-eyed commentators have claimed. Third, it completely failed to surprise me that the administration wiped the floor with the dissident creditors in both private and public, given its vastly superior negotiating position. And finally, I personally found the whiny, martyred tone of the public pronouncements from said dissidents both morally and aesthetically repugnant.

Begging your indulgence for a moment, I will repeat the summation from my prior piece here:

Here's a clue for the novices in the room: It's called politics, you fucking morons. Stop being such a bunch of whiny pansies.

* * *

Now, thanks to the crack reporting of a newspaper which all right-thinking troglodytes will henceforth consign to the ninth circle of capitalist hell, along with other traitors to kith and kindred, we learned just how badly Chrysler's creditors judged their chances, and how thoroughly the government spanked their little bottoms:

President Barack Obama's auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.

"And not a penny less," said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.

The next day, Mr. Obama called the banker's bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.

A few hours later, Mr. Lee called Mr. Rattner back. "We need to talk," he said.

The banker's about-face was a vivid example of the government's tightening grip on a humbled financial industry. Pulling a trick from the hedge-fund playbook, the government used its leverage as the sole willing lender to Chrysler, either in bankruptcy court or out, to extract deep concessions from some of the country's biggest banks.

My, how the worm turns.

Notwithstanding the concerted attempt by certain creditors and third-party commentators—whose passion and outrage seemed to vary inversely to their closeness to and understanding of the actual situation—to portray the dissident lenders as saintly defenders of widows and orphans unjustly crushed beneath the hobnailed boot of an overweening Executive Branch, it appears that almost everyone involved understood exactly what type of game they were playing:

Many of the lenders believed the administration wouldn't let Chrysler file for bankruptcy. "The plan was to call the government's bluff. The game was to game the government," said a manager of a distressed-debt fund.

In retrospect, perhaps that wasn't the best of plans. It's hard to win a gun fight when all you bring is a penknife.

In the following days, the lenders began to realize their leverage was small and dwindling. Only the government had the ability or willingness to finance a bankruptcy reorganization of Chrysler, while also supporting its warranties and suppliers and recapitalizing Chrysler Financial. None of the lenders, some of which had consumer operations in the Midwest near Chrysler plants, had any desire to take over and liquidate the company.

Anyway, we all know the outcome. The large secured lenders folded, smaller dissident creditors balked, and the Administration threw the company into bankruptcy court, where a judge was charged with dividing the baby. As soon as the dissidents saw there were enough votes among the capitulating creditors to cram down the government's restructuring plan, and the judge was not inclined to block it, they threw in their cards and walked away. No matter what their ideological attitudes were, I think they eventually realized the fiduciary duty they defended so loudly in the press could come back to bite them if they continued to waste their investors' money in fruitless battle.

* * *

Now the good news in all this hullabaloo is that the system worked exactly as it should. Stakeholders in a financially troubled company always have the right to negotiate a restructuring solution outside the courtroom, and Chrysler's did. There are indeed extensive precedents for the division of value among various stakeholders, including a normally preferential position for secured creditors. These provide useful guideposts for negotiation, but they are neither absolute and unvarying in every situation, nor are they the only legal principles which govern a corporate restructuring.²

Furthermore, bankruptcy case law makes allowance for occasions when contending parties have such lopsided negotiating leverage that the solutions proposed can be unfair. In these instances, an independent judge has discretion to revise or even scrap a plan in favor of minority and other interests where appropriate. This is exactly what happened: the government attempted to ram down a plan adverse to the interests of secured creditors, a small, determined subset of those creditors screamed bloody murder, and a bankruptcy judge considered the facts and nonetheless ruled against them. Due process and the rule of law had their day, the sun rose in the east and set in the west, and everyone went home to watch American Idol on flat screen television. Case closed.

Far from representing evidence that the Administration has set out sub rosa upon a course of stealthy expropriation, creeping socialism, or outright fascism, the final outcome in the Chrysler case simply represents the triumph of bare knuckled negotiation from a position of overwhelming strength, within the settled confines of existing law and practice. The government simply did what any hedge fund driven by fiduciary duty and self interest would have done if it held the reins: it dictated the terms it wanted to see, and it told the creditors to pound sand if they didn't like it. The creditors, on the other hand, seemed to sally forth onto the field of battle without fully considering who was supplying their reinforcements (the Treasury), where they were fighting (in the forum of public opinion, as well as the arena of commerce), and the outside chance that their primary opponent might be smarter than a bag of hammers (and therefore realize and exploit its advantages). In return, they got schooled, but good.

I see little reason to give credence to those alarmists who see the Chrysler case setting a dangerous precedent. With the admittedly substantial exception of General Motors—whose existing creditors should be busy stocking up on Vaseline, ball gags, and Motrin—I cannot fathom why the government would want to get more broadly involved in corporate restructurings. The process causes massive amounts of brain damage, absolutely nobody likes the result—with the possible exception of the lunatic fringe on the left—and it sets up the Administration for all sorts of political pain in the future. There is absolutely no upside and tons of downside, which is a situation so anathema to politicians that most of them spend their entire careers dodging difficult decisions that would land them in such soup. Obama cannot be happy about it, unless he is an idiot or a nut. I will hazard an educated guess that he is neither.

Listen, I'm all for sanctity of contracts, the rule of law, and a stable, predictable bankruptcy process. I think they are critical underpinnings to our current system, which I happen to admire, warts and all. Undermining any of them would be a serious mistake, with long-term deleterious consequences both to the economy and the political fabric of the country.³ Should I see any real evidence that ne'er-do-wells from any branch of government are moving demonstrably down that path, I will don my cammo fatigues, grab an AK-47, and join Equity Private and her fellow Objectivists on the barricades toot sweet. (My first act of insurrection would be to pick off any Aeron Chair Socialists I happen to see tampering with the traffic signals.)

But the system we have is strong. The strongest defense against accidental or intended overreach by the government in any bankruptcy situation will be the swift and decisive ruling of a bankruptcy judge. Call me naive if you will, but I have seen enough grinning, pointy-toothed restructuring advisors in my day to know that any judge capable of swatting them down will be more than up to the task of telling Steven Rattner where to get off. Most of those judges can bite the ass off a grizzly bear.

* * *

Which leads me to my final remarks.

I continue to find the whinging and apocalyptic fear-mongering from certain quarters of the finance and business community about the government's present involvement in economic affairs despicable. For chrissakes, people, what did you expect? The bloody economy has gone off the rails, the global financial system is in tatters, and millions of citizens are seething on the unemployment line. (2010 election motto: I'm unemployed, and I vote.) The market failed. Deregulation didn't help. And the only economic actor with the will and the financial wherewithal to borrow heavily enough from the future—our future, natch—to fix this shitstorm is the government. Did you really think you were going to get government help without a government (read political) agenda? What are you smoking?

It doesn't take a masters degree in political economy to realize that when you go up against the government in a financial negotiation where it holds all the cards—including some of yours—you are going to get your head handed to you on a platter. Deal with it. Buck up, and move on. Find a less lopsided game to play in.

Because I can guarantee you the government and 95% of the people who elected it to power don't give a rat's ass that you're going to lose money on your Chrysler bonds.

¹ If, in fact, I failed to make any of the following points, or failed to make them clearly, consider them made here. Honestly, I can't be bothered to treat these pages like a fucking Freshman debate class.
² Readers who are open to learning something about this—as opposed to continuing to tilt at real and imaginary windmills—could do much worse than to consult The Bankruptcy Litigation Blog here, here, and here.
³ George Akerloff and Robert Shiller contend that real and perceived government interference in the economy helped depress business investment and was a serious contributing factor to the general loss of confidence and malaise they credit for the length and depth of the Great Depression. Animal Spirits. Princeton: Princeton University Press, 2009, pp. 69—70.

© 2009 The Epicurean Dealmaker. All rights reserved.

You Realithe, Of Courth, Thith Meanth War

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Mon, 04 May 2009 03:05:00 +0000

"Consequences, Schmonsequences, as long as I'm rich."

"I may be a craven little coward, but I'm a greedy craven little coward."

— Daffy Duck (attributed)

Apparently unlike many of my fellow citizens, I freely confess that I harbor no morbid fascination for car crashes. Many people seem unable to draw their eyes away from the spectacle of thousands of pounds of hurtling vehicle rearranging itself into a smoking pile of mangled metal and broken bodies. For my part, I prefer to look away, both before and after the fact. I feel no great compulsion to remind myself that when metal and flesh collide at speed, flesh is always and everywhere the loser. I claim no moral superiority for my behavior, simply a finely tuned squeamishness and a certain intellectual distaste for repeated demonstration of the obvious.

Hence, you should not be surprised when I admit I have not devoted more than cursory attention to Chrysler Corporation's developing bankruptcy. The multifarious sources of the crash have long been evident to any sentient being with a pulse. In addition, the looming bankruptcy itself has been unfolding for so many months it resembles the slow motion pile-up in Talladega Nights, which takes so long the TV announcers break to a commercial in the middle of it. A bloggist less honest than myself might claim he saw the wheels coming off the LeBaron almost two years ago. Fortunately, your Dedicated Correspondent is above such petty credit-jumping.

But now that the patient has been wheeled into the operating theater, where a bankruptcy judge will soon commence the drawn-out and delicate procedure of reconstituting Chrysler into a viable new company which will magically produce vehicles irresistible to all those consumers previously inured to their temptations, I have begun to take notice of a certain strain of commentary which I feel compelled to address.

This commentary seems to issue primarily from Chrysler's secured creditors and their supporters, apologists, and fellow travelers. I believe one can fairly characterize the essence of this commentary as

"Waaah! The Government is Picking on Me!"

To be perfectly honest, I find this intensely amusing.

* * *

The first indications I received that all might not be well in the temples of untrammeled commerce came from a self-described group of Chrysler's smaller secured creditors, who objected in print and in public last week to what they perceived as President Obama's rather shabby treatment of them in the whole mess. In their communiqué, they whined about being shut out of direct negotiations with the government, groused about dramatically lower recoveries on their debt than secured lenders at General Motors, and wrapped themselves in the saintly robes of Sanctity of Contracts and Fiduciary Duty. And, knowing full well that the government would do it for them, they pompously proclaimed that they would never push Chrysler into bankruptcy.

The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well being of the company’s employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades.

Heavens to Betsy! Save the Bankrupcty Code!

The next little goodie to cross my consciousness was the allegation by White & Case lawyer Tom Lauria, subsequently denied by the White House and Mr. Lauria's client Perella Weinberg, that the White House has been playing very hard ball indeed in the Chrysler negotiations:

"One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight...That was Perella Weinberg."

Finally, to cap it all off, we received this little bulletin from the front lines of capitalist hysteria¹ late Saturday night:

This (as yet unproven) yarn goes exactly like this:

Confronting the head of a non-TARP fund holding Chrysler debt and unwilling to release it for any sum less than that to which it was legally entitled without compelling cause, this country's "Car Czar" [Steven Rattner] berated the manager of said fund with an outburst of prose substantially resembling this:
["]Who the fuck do you think you're dealing with? We'll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.["]
Faced with these sorts of threats, in this environment, with valued employees in the crosshairs and AIG a fresh, open wound upon the market, the fund folded.

Fuck the Bankruptcy Code, and Betsy, too! Save us instead!

* * *

Now, I would like to make a few remarks in reaction to this.

First, while I have no particular knowledge of the facts and circumstances surrounding the negotiations over Chrysler's restructuring prior to its bankruptcy filing—and no eager little beavers are sending me real or imagined transcripts of inflammatory conversations which may or may not have taken place—I have no reason to doubt that these conversations or ones similar to them did in fact take place. In fact, I would be surprised if they had not.

Think about it. The political stakes for the Obama Administration in the Chrysler fiasco are monumental. Barring the ongoing clusterfuck in the finance industry—which is arguably a legacy problem inherited from the previous bumblefuck administration—Chrysler is Obama's first big test to fix an incredibly hairy political, social, and economic dilemma. I would be shocked—shocked!—if every member of the Administration charged with its resolution was not under tremendous personal and professional pressure . In such circumstances, I think it is the height of folly not to expect a great deal of vituperative language, threats, and other nastiness to come spilling out of the mouths of such individuals. Is such behavior right, proper, or even polite? Of course not. Should allowances be made for it? Yes indeed.

Saying awful, hurtful, or even threatening things under conditions of high stress is normal human behavior. Anyone who has not been on the giving or receiving end of such treatment from another human being at least once in his or her life is either a) lying, b) staggeringly obtuse, c) certifiably autistic (see (b)), or d) incredibly immature.² The proper response to such an attack can be any number of things: defuse it, ignore it, deflect it, or retaliate. How one responds depends on the situation at hand.

This leads to my second point. The negotiations over carving up claims to Chrysler Corporation prior to bankruptcy were just that: negotiations. Notwithstanding whatever principles of Truth, Justice, and the American Way the Chrysler non-Tarp lenders would have us believe undergird their positions, they were simply one party among many to a very complicated negotiation over the proper distribution of value of a very large and troubled company. Yes, there are general principles and precedents concerning the division of spoils in a corporate bankruptcy which normally guide such processes. Yes, many of these have been laid down over decades of contested and uncontested bankruptcies prosecuted through our court system.

That being said, none of these precedents are Holy Writ.

The parties to the Chrysler negotiation tried to agree to a prepackaged division of spoils which they could present to a bankruptcy judge and thereby speed the company's restructuring. They failed. Did someone—the government, the UAW, the non-Tarp secured lenders—overreach? Maybe. Does it matter who? Not in the least. A pre-agreed deal was not struck, so the distribution of claims to Chrysler will be determined in court, by a judge, who will listen to advocates for each group argue their case. The process will take longer, and perhaps introduce additional stresses and strains that Chrysler can ill afford, but everyone will have their day in court. Even those poor, put-upon non-Tarp lenders. In fact, even though they would likely be loathe to admit it publicly, everyone may be happier that the company has fallen into Chapter 11. That way, each can say to their own constituents that they tried as hard as they could, but were unable in the end to get everything they wanted. (Chief among these, by the way, I would place the Administration.)

The corollary point of negotiations is this: they are hard, and often unpleasant. Parties to a bankruptcy say hard, unpleasant things, they threaten and cajole, and they use all their powers of persuasion, soft and hard, to convince the other parties to the deal to give them what they want. In this context, why should anyone be surprised that agents of the government threatened recalcitrant lenders with IRS audits, excoriated their behavior in populist press conferences, or promised to destroy their institutional reputations in the public eye? The government was simply using the real and imagined powers at its command to browbeat its counterparties into agreement. This is standard operating procedure in high-pressure negotiations.

Had I advised the government on Chrysler, I would have encouraged them to use the very same tactics.

Of course, anyone on the other side of the table during such outbursts who had half a brain or any sort of experience in such matters would have recognized them for what they were: bluffs. And they would have countered with their own hard and soft power, and their own real and imagined levers of persuasion—"fiduciary duty," for example, and David and Goliath press releases would have worked (and did work) nicely—to push back in turn. Furthermore, if threats and bullying appeared to cross the line, the affected party was always free to politely remind the offending official that there are such things as limits to power in this country, and very nasty things tend to happen to public figures who abuse them. Every corporate and individual citizen in the United States is legally subject to an IRS audit at any time. But precedent, tradition, and most Americans' innate fear and hatred of the IRS reassure me that any official who was discovered to have triggered one on a purely political basis would face blowback of career-ending proportions.

* * *

Now I assume the non-Tarp Chrysler lenders actually brought someone to the restructuring negotiations who knew what the fuck he was doing. (If they didn't, too bad for them.) They clearly have learned they need to work the press as hard as the Administration, if only so they do not appear to concede the government's talking points by their own silence. Sad to say, this will be a Sisyphean task, since hedge funds and finance companies of every stripe have a reputation with the general public only slightly less awful than that of drug-dealing child molesters. I personally understand and am sympathetic toward their argument of fiduciary duty, but vulture funds wrapping themselves in the banner of widows and orphans won't do them much good. In all but the most hardened capitalist cadres' hearts, working mens' paychecks and the Public Weal still trump the profit motive, even if it is Aunt Millie's profit.³ They also play better on national TV.

Lastly, I fear I will disappoint my card-carrying capitalist comrades by remaining defiantly unconcerned that the Obama Administration is playing hardball in the current economic crisis. After all, the President and yea, even the US Congress, have their own fiduciary duties to prosecute and uphold. Many of the people to whom they owe their duty have few or no other advocates in economic affairs. Call it my stubborn American sense of fair play, but I cannot see why everyone with a stake in the outcome shouldn't have a competent and committed representative on the field of battle.

Perhaps some financiers feel a little miffed now that they have to fight for what they think is their due, after having had the field to themselves for so long.

Here's a clue for the novices in the room: It's called politics, you fucking morons. Stop being such a bunch of whiny pansies.

¹ Editorial note to Equity Private: Stressed out, hyperaggressive former investment banker and private equity professional reaming hedge fund guy a new asshole during bankruptcy negotiation : Deliberate government swerve toward "Fascism" :: Bouncing a check to your local laundromat : Lehman Brothers' bankruptcy. I don't care how many academic or pseudoacademic definitions of fascism you provide, you have well and truly jumped the shark with this post.
² And any professional dealmaker who does not recognize this is either a) brand new to the business or b) headed toward the unemployment line.
³ Especially if, as I suspect, a majority of these "widow and orphan" funds picked up their Chrysler secured debt at pennies on the dollar, with the express intent to profit from its pull toward par in a bankruptcy proceeding. A little harder to spin that story in Middle America, ain't it?

© 2009 The Epicurean Dealmaker. All rights reserved.

Oh No You Di'int

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Thu, 23 Apr 2009 18:48:00 +0000

"Don't make me angry. You wouldn't like me when I'm angry."

— The Incredible Hulk

Oh, no, no, no, no, no.

Nuh-unh. No way. Forget it.

John Carney over at Clusterstock called my attention this morning to a little nugget in The Wall Street Journal which I missed yesterday. In retrospect, I understand why I skipped over the offending piece, because it started in the most unsurprising and anodyne way possible:

Financial Firms Lobby to Cut Cost of TARP Exit

By DAMIAN PALETTA and DEBORAH SOLOMON

WASHINGTON -- The banking industry is aggressively lobbying the Treasury Department to make it less costly for financial institutions to get out of the Troubled Asset Relief Program.

Big whoop, right? That's what I thought, and that's why I didn't even bother to scan the rest of the article. Who needs to read about yet another pork-fed banker from East Bumfuck, Arkansas complaining how those evil, socialist TARP funds prevent him from serving deep-fried Twinkies to his retail customers? Not me.

Fortunately, however, Carney actually read the thing, as good journalists are wont to do. Then he offered up a slightly more accurate headline for what is going on:

Banks Lobby To Screw Taxpayers Out Of Billions

Well, that caught my attention. Being a taxpayer and all.

* * *

It turns out those clever little scamps from K Street are pressuring the government to "expunge," or void, the warrants the Treasury Department received in TARP funds recipients' stock when it loaned them the money. The Journal explains:

Many banks want to return their TARP money and, as part of that effort, want to expunge the warrants. To do that, banks must either buy them back from the government or allow the Treasury to sell them to private investors.

...

Bankers say it is unfair to charge what amounts to a "prepayment penalty," which makes it additionally onerous to escape TARP. Bank representatives say the cost of buying back the warrants could be equivalent to paying 60% annual interest on short-term loans. That, they argue, would exacerbate banks' existing problems.

Aww. Poor, poor pitiful bankers. Don't you just bleed for them?

But Carney detects a darker subtext to the article:

The banking sector lobbyists have been arguing that they should be allowed to purchase the warrants back at deeply discounted values, or [perhaps] even have them cancelled outright on the grounds that they are currently worthless.

Based on some key passages from the WSJ article, and what I know of human depravity, I suspect he is right. But the rub here is that these warrants are in no way worthless, even though the prices at which the Treasury could exercise them and exchange them for common stock are currently above the market prices for the underlying banks' stock.

* * *

In fact, they are extremely valuable. (Carney's source pegs the combined value of the Goldman and JPMorgan warrants alone at around $3 billion.) It is pretty easy to understand why.

Simply put, a warrant is nothing more complicated than a long-dated, privately contracted form of call option on an underlying stock. The key word here is "option." The warrant holder has the option, not the obligation, to exchange the warrant for shares of the underlying stock at any time during the life of the security. Therefore, the fact that the underlying stock is trading below the exchange or exercise price at any one time (i.e., is "out of the money") means approximately bupkis. The warrant still has value, because the holder still has an opportunity to exchange it for stock at a profit at any time during the remaining life of the warrant.

Unless you believe there is absolutely no chance that any of the bank stocks subject to the TARP warrants will ever climb higher than their exercise prices over the next nine or so years, you have absolutely no basis to claim that the warrants are worthless. In fact, I might venture out onto a limb and speculate that even such a rank, moldy piece shit as Citigroup stock might crawl out of the cellar sometime in the next decade. (Well, don't quote me on that.) Ten years is a very long time, in market terms.

The handy-dandy graph above shows the relationship between the value of a call option, or warrant, at any one time, and the option's "intrinsic value," or "moneyness," which represents the value of the underlying stock minus the exercise (or "strike") price of the option. You can see that an option always has value, even if it is out of the money. This is because there is always the possibility that the underlying stock could move in the option holder's favor, thereby coming into the money and generating a profit. You will also notice that, even at the far right edge of the graph, where the option is deep in the money, the option is still worth more than its intrinsic value alone. As long as any time whatsoever remains to expiration, a call option gives its holder an opportunity to make more money if the stock moves up even further and also confers the valuable right to walk away without exercising if the stock suddenly drops far enough to make exercise uneconomic. Obtain such rights over a highly volatile stock like Citigroup or Bank of America for ten years, and you have a really valuable piece of paper.

You would think the self-styled paper of record for financial matters in the United States would understand this. (It is Options 101.) You would be wrong. Instead, the Journal reporters spoon feed their readers this bit of tendentious nonsense:

Today, most of the warrants are essentially worthless, because their exercise price is higher than where most banks' stocks are trading. But the government believes the warrants still have value, since they give the Treasury the right to buy common stock at a set price for 10 years.

You got that, Rick Santelli? The warrants really are worthless, but the government "believes" they still have value. And we all know if the current government "believes" something, it must be cover for a creeping socialist plot. If any recent Journal sentence is more likely to end up on a hand-lettered poster carried by a financially illiterate troglodyte at the next anti-government "Tea Party," I would like to know what it is.

So I can throw up now and get it over with.

* * *

Anyway, I am with Carney in hoping there is someone at Treasury who is smarter than these reporters, and who has the taxpayers' interests enough at heart to beat the crap out of any banker who comes whining for relief with such disingenuous bullshit. Someone also needs to take Barney Frank aside so he can head this attack off at the pass in Congress, too. I shudder to think what mincemeat a clever banking lobbyist can make of the bog standard Congressman or -woman who can't balance his or her checkbook.

Frankly, getting warrants in the underlying stock of the TARP recipients was one of the few elements of the whole misbegotten process I thought the Treasury got right. If we taxpayers are going to pull the collective chestnuts of a bunch of incompetent boobs out of the fire by lending vast amounts of funds at below-market interest rates, I—unreconstructed capitalist that I am—sure as hell want to make sure we share in said boobs' potential recovery. No (balance sheet) remediation without (profit) participation, you might say.

But in the final analysis, I worry that Tim Geithner and his three junior colleagues at Treasury persist in bringing rusty penknives to a gun fight. Career bureaucrats and third-year Analysts fired from Merrill Lynch just can't compete with investment bankers who compute option vegas in their heads and persuade Eastern European prostitutes to pay them for sex.

You need some help, man. Hire some real bankers to negotiate for you.

The offer still stands. Call me.

© 2009 The Epicurean Dealmaker. All rights reserved.

Welcome to Duloc!

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Tue, 21 Apr 2009 23:52:00 +0000

"I just know before this is over I'm gonna need a whole lotta serious therapy. Lookit my eye twitchin'."

— Shrek

It appears that, notwithstanding my diligent efforts to the contrary, more and more ~~hapless boobs~~ poor misguided souls are independently discovering or being intentionally directed toward these pages.

Today's¹ precipitous surge of ten new visitors seems to have been triggered by a malicious Tweet from blogging legend Paul Kedrosky, who clearly got pissed off at his Twitter followers for some reason or other this afternoon and steered them this direction in retaliation. One can only imagine the sort of misdeeds Mr. Kedrosky's acolytes must have perpetrated which could make the normally equable pundit snap so viciously. [*Shudder*]

Aannny-hoo. Here you are, so I suppose I should offer some sort of desultory introduction to the site.

DESULTORY INTRODUCTION TO THIS SITE
Most of what you need to know is already scattered about this location, but since I am known for recondite, abstruse, and impossibly verbose verbal stylings, I thought for courtesy's sake I would collect them here in one clean, nifty, well-lighted post. That way, once you have discovered that your innate interest in my pontifications ranks slightly below having your genitals gnawed off by ill-tempered, mutated sea bass with laser beams attached to their heads, you can slink quietly away without disturbing the less discriminating readers among my audience.

Herewith, perhaps, are some of the thoughts which may be roiling your pretty little heads right now:

Who the hell is this guy?: (Funny, that's what Steve Schwarzman keeps asking.) I am me: investment banker, M&A guru, economic and financial commentator without portfolio, guy on a bell tower with an AK-47. They haven't caught me yet, and I'll be damned if they ever do.

What the hell do you write about?: Oh, you know: life, the universe, and everything.² More specifically, I tend to focus on those areas which I happen to know a little bit about, like M&A, investment banking, financial markets, a smidgen of non-traditional economics, and industry-standard binomial-lattice pricing models for Star Trek memorabilia.

Focusing on what I know is one of the traits which distinguishes me from 99.9% of all professional bloggers (and Nobel laureate economists) in the universe. Should you be interested in reading some stuff by other members of this select 0.1%, you can find them to your left under "Links Worth a Click."

Why the hell haven't I heard of you before?: How the fuck do I know? Do I look like your mother?

Seriously, though, no-one has heard of me. It's part of my charm. So, read quickly before Kedrosky or somebody else sends another ten guys over to louse up the party and drink all our beer.

Why the hell don't you allow comments on your site?: Are you kidding? With the kind of language you're using right now? This is a goddamn family blogsite, fer chrissakes. Geez.

In all seriousness, I don't have time to wade through thousands of vulgar, harebrained responses by the likes of Steve Schwarzman and Paul Krugman to the impeccably balanced and thoughtful word bombs I post here. I have a day job, you see. At least until my partners fire me and revoke my charter membership to the Emperor's Club. So forget it.

Should you feel absolutely convinced that you have something incredibly important to say to me, feel free to send me an e-mail via the instructions contained in the "About Me" section of this website. I promise to read it before deleting it, and if you include valuable insider trading stock tips or a foolproof way to win the New York Lottery, I may even send you a small token of appreciation in return. Word to the wise, though: don't hold your breath.

I am sure you all have a passel of pressing questions yet to be answered, but frankly I can't be bothered right now. Come back in six months or so, and I might post another scintillating gem of heartbreaking genius for your entertainment. Or not.

In any event, this post is over. Piss off.

¹ I am nothing if not topical. "Today," in this instance, refers to the original date of this posting. Since I intend this introduction to remain standing long after Manhattan has sunk beneath the waves, I encourage you to jump lightly over the temporal reference without excessive concern. Sort of like you jump over some character's Russian patronymic in a Tolstoy novel, if you're into that sort of thing. If the world has changed so much that you don't know what I mean by Twitter and Tweets, well ... I can't help you.
² Anyone diligent enough to have clicked the links above has discovered that it is integral to my peculiar genius to foil easy searching of these archives by less-than-dedicated readers. No trite, obvious keywords here. So, if you want to find something specific, like "Pictures of Steve Schwarzman fucking a goat" or "High speed rail service in Mogadishu, Somalia," may I direct you to the upper left corner of your screen? There you will find a remarkably straightforward Blogger.com search box which should satisfy your cravings. Enjoy!

© 2009 The Epicurean Dealmaker. All rights reserved.

Weekend Tonic

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Fri, 17 Apr 2009 23:24:00 +0000

A faithful reader writes that I have become over-strident and harsh in some of my recent scribblings. This is fair criticism. Enforced inactivity in my profession and uncertainty in the economy wear on me, just as I presume they do on many of you.

As a modest token of amends, please accept these offerings from two of my betters as helpmeets to improve your weekend mood:

When I play on my fiddle in Dooney,
Folk dance like a wave of the sea;
My cousin is priest in Kilvarnet,
My brother in Mocharabuiee.

I passed my brother and cousin:
They read in their books of prayer;
I read in my book of songs
I bought at the Sligo fair.

When we come at the end of time,
To Peter sitting in state,
He will smile on the three old spirits,
But call me first through the gate;

For the good are always the merry,
Save by an evil chance,
And the merry love the fiddle,
And the merry love to dance:

And when the folk there spy me,
They will all come up to me,
With ‘Here is the fiddler of Dooney!’
And dance like a wave of the sea.

— William Butler Yeats, The Fiddler of Dooney

A Heartbreaking Work of Staggering Hubris

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 15 Apr 2009 22:35:00 +0000

Okay. How hard can writing a query letter to a literary agent be?

Dear [Agent name],

I chose to submit to you because of your wonderful taste in [genre], and because you [personalized tidbit about agent].

[protagonist name] is a [description of protagonist] living in [setting]. But when [complicating incident], [protagonist name] must [protagonist's quest] and [verb] [villain] in order to [protagonist's goal].

[title] is a [word count] work of [genre]. I am the author of [author's credits (optional)], and this is my first novel.

Thank you for your time, and I look forward to hearing from you soon.

Best wishes,
[your name]

Right. Let's do this.

– I –

Dear [Agent name],

I have chosen to submit my work to you due to your impeccable taste in anonymous financial blogs, and because you seem to be careless enough to have opened this e-mail rather than deleting it unread. I like the combination of flawless aesthetic judgment and complete ignorance of proper time management principles this indicates. I feel we could work together well.

Albert Nothnagle III is a rich, brilliant, staggeringly handsome investment banker living and working in New York City in the early years of the 21st Century. Albert's life seems complete, with a devoted wife, impossibly talented and accomplished children, and a series of stunningly beautiful Ukranian mistresses gracing the silken sheets of the impeccably decorated bedroom in his capacious pied à terre. But when jealous coworkers and zealous federal prosecutors go after Albert on trumped-up charges of insider trading and naked jaywalking, he must rediscover his inner Ayn Rand and humiliate his detractors in order to secure an invitation to deliver the keynote address at Davos.

NOTHNAGLE UNBOUND is a 70,000-word work of ~~wishful thinking~~ nostalgic financial fiction. I am the author of several unpublished erotic letters to Giselle Bundchen, and this is my first novel.

Thank you for your time, and I look forward to hearing from you soon.

Best wishes,
The Epicurean Dealmaker

Nah. No-one would would believe such a fairy tale. Investment bankers can't afford Ukranian mistresses nowadays.

[ ... ]

– VI –

Dear [Agent name],

I chose to submit to you when I saw your picture on your agency's website wearing that godawful toupée. Anyone that insensitive to ridicule should find marketing my book a cinch. I anticipate a close working relationship.

Apu Nahasapeemapetilon is a plucky, cheerful, staggeringly intelligent financial engineer living and working in London, England in the latter years of the first decade of the 21st Century. Apu's life seems complete, with a devoted cat, adorably geeky coworkers and friends, and a complete collection of bootleg Battlestar Galactica episodes never before aired on television. But when the global financial system begins to melt down and correlations across all asset classes converge to one, he must battle his way across a wracked and burning London convulsed with G20 protesters in order to reboot the Amiga laptop at the heart of Morgan Stanley's global risk management system and, naturally, save the planet.

THE COPULA IDENTITY is a 80,000-word hodgepodge of Mandelbrot distributions and engineering suspense, enlivened by several original curry recipes. I am the author of the industry standard binomial-lattice pricing model for Star Trek memorabilia, and this is my first work in English.

Thank you for your time, and I look forward to hearing from you soon.

Best wishes,
The Epicurean Dealmaker

Hmm. Too esoteric? I like the idea of the curry recipes, though.

[ ... ]

– XXIII –

Dear [Agent name],

I am sending you this e-mail because you are the last name on my list. I expect a very large advance check.

The Epicurean Dealmaker is a sour, misanthropic, staggeringly verbose anonymous blogger who claims to live and work in Manhattan during the present day. TED's life used to be complete, with fawning subordinates, more money than God, and the unalloyed admiration of Fed Chairmen and MBA students alike. But when the heads of most major investment banks decide en masse to shit the bed, he must find some way to monetize the thousands of words he has spewed forth on the internet in order to make payments on the Lamborghini.

INVESTMENT BANKERS CAN'T WRITE is a 120,000-word semi-fictional memoir of a friend of mine who really, really does exist. I am the author of caustic character assassinations and semi-instructional diatribes on the web, and this is my first time trying to write while sober.

Thank you for your time. Don't fuck with me.

Best wishes,
The Epicurean Dealmaker

Done to Death by Slanderous Tongues

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 15 Apr 2009 02:49:00 +0000

Leonato: "Which is the villain? Let me see his eyes,
That, when I note another man like him,
I may avoid him. Which of these is he?"
Borachio: "If you would know your wronger, look on me."
Leonato: "Art thou the slave that with thy breath hast kill'd
Mine innocent child?"
Borachio: "Yea, even I alone."
Leonato: "No, not so, villain; thou beliest thyself:
Here stand a pair of honourable men;
A third is fled, that had a hand in it.
I thank you, princes, for my daughter's death:
Record it with your high and worthy deeds.
'Twas bravely done, if you bethink you of it."

— Much Ado About Nothing

I tell you what, my friends.

I understand the widespread anger average citizens feel toward bankers and their kind. I really do. In fact, I believe a large portion of that opprobrium is very well-deserved. Greed, arrogance, stupidity, and hubris have permeated the financial services industry over the last several decades, and when the recent credit bubble burst and the inevitable shit hit the fan, many individuals were justifiably upset that they were splattered with debris as well.

I personally am seriously pissed off, as my own net worth and investments are in tatters, my business of advising corporations is lying comatose on a hospital gurney, and my tax bill for the indefinite future is likely to reach the stratosphere in order to pay for the reckless bumbling of the feckless knuckleheads who were in charge of our financial system this past decade. And who, by the way, raised the price of every good and service I consumed these past years through the increased pressure of their stratospheric pay.

That being said, I am getting pretty goddamned sick and tired of ill-informed, self-righteous, ignorant assholes taking gratuitous pot shots at my industry and the people who work in it, simply because they are too intellectually lazy to address the problem in all its complexity and nuance. Too many well-educated commentators and pundits in a position of influence and authority—people who should know better—are channeling the CAPS LOCK hooligans in the comments section of the blogosphere with virtually no filter. When they do so, they come across—to me, at least, and to anyone who has more than a passing acquaintance with the global finance industry—as damn fools.

Or worse.

* * *

Exhibit A in the List of Shame is Steven Pearlstein of The Washington Post, who penned this this little gem of character assassination last week:

The most important is culture -- in the case of Wall Street, a culture that not only tolerates but almost celebrates taking advantage of customers. Here is an industry in which brokers traditionally get their start making cold calls to strangers, offering bogus stock tips, and investment bankers cut their teeth peddling bad merger and acquisition ideas to corporate clients. It is an industry in which the majority of money managers consistently underperform the broad market averages, analysts and strategists are almost always bullish, and firms rarely run into a security that can't be brought to market. These days, Wall Street is a place where the trading culture has supplanted the investment culture and score is kept on the basis of how many securities a banker or a firm underwrites rather than whether those securities actually turn out as good investments.

Leaving aside the minor quibble that it is not Wall Street's job to make sure every security that ends up in Mr. Pearlstein's 401K is a "good investment," whatever the fuck that is supposed to mean, I take severe umbrage at his characterization of my colleagues and me as shysters, hucksters, and con artists.

I don't know what kind of stockbroker Mr. Pearlstein is familiar with, but I can assure him that most practicing financial advisors haven't knowingly peddled a "bogus stock tip" to an existing or potential client in their entire careers. Sure, there are bad apples, and even a few bad firms that spring up from time to time (usually during an investment boom driven and eagerly participated in by credulous sheep who view investing as just another get-rich-quick scheme), but in the past our industry has made a point of getting rid of these as soon as possible. It's just good business practice to do so, you see. We don't want the friggin' lawsuits.

And, in twenty years of offering M&A and financial advice to corporate clients, I have yet to meet someone who has intentionally pushed a "bad" M&A idea to a client, either. Sure, I've been in pitches where a banker has proposed silly, ill-thought-out, or downright stupid M&A ideas to a client, but those instances are either unintentional—in which case the client throws the banker out of his office and said banker usually gets fired in the next round of layoffs—or intentionally designed to provoke a deeper and more productive dialogue with the client.

And by the way, who the fuck is Mr. Pearlstein to judge what is or is not a "bad" M&A idea? Just another passenger on the "All M&A is Bad" bandwagon originated by self-interested consulting firms and supported with ludicrously weak "event studies" which claim to identify value creation or destruction from M&A based on stock price performance before and after a deal? Poppycock.

I might just as well label the entire print journalism profession a meretricious collection of liars, fakers, and unscrupulous hacks based upon the evidence of a few bad apples like Jayson Blair. I, however, have the intellectual honesty to know better. (I also lack the financial incentive, unlike Mr. Pearlstein and his fellow journos, to tell my audience what they want to hear, whether or not it is correct.)

* * *

Exhibit B in this slander fest is that great man and Nobel laureate Paul Krugman, who dished up his own poisonous stew of half-truths and innuendo last week as well. He cited the work of Thomas Philippon and Ariel Resheff—which I have referred to approvingly in the past—describing the waxing and waning of the domestic finance industry in this country over the last century. What Mr. Krugman seemed to miss, however, was what I have taken to be one of Messrs. Philippon and Resheff's principal points: that the size of the financial services sector has fluctuated in the past in response to structural shifts in the economy and variation in demand for financial services like securities underwriting, capital formation, and M&A from non-financial companies.

Instead, he regaled his audience with crowd pleasing nuggets like this:

The banking industry that emerged from [the Great Depression] was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.

Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.

After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.

Of course, the implication a casual reader of this passage would derive is that the size of the financial sector is almost wholly dependent on how big the government allows it to be. Until the eighties, bankers were boring and conservative. Constrained by regulation, they just didn't allow anyone to borrow money. Happiness, economic prosperity, and moral rectitude broke out all over the place. Then, the nasty eighties intervened, government shackles came off the greedy and grasping bankers, and they spent the next thirty years ramming debt of every description down the throats of (presumably) reluctant corporations and consumers because they wanted to grow their exciting industry and get rich.

Nowhere in this narrative is the notion that bank and other financial intermediaries grew in response to a sustained increase in demand for their services from corporate and individual consumers.

Huh?

Would the esteemed economist from The New York Times care to explain to me exactly how the finance industry was able to unilaterally increase demand for its services while drastically expanding its operating margins? Maybe I don't remember my entry-level Economics so good, but that strikes me as a somewhat dubious proposition. And yet, that is exactly the conclusion an inattentive or ill-informed reader would draw from Mr. Krugman's tendentious screed: regulate those nasty bankers, before they force our country to lever up and make them filthy rich again!

* * *

I am thankful that Charles Davi at The Atlantic has spared me further heavy lifting by dousing Brad DeLong and Matt Yglesias, who are Exhibits C and D in this shitshow, with a curative dose of cold water. Sadly, I fear we have not seen the last of such pandering. It plays too well.

This strain of commentary is all part and parcel of one of the dominant memes circulating our culture at present: that somehow, someone (else) has tricked our innocent asses into this mess, and we'll be damned if we don't detect evil self-dealing and conscious fraud wafting off the perpetrators. At its core, the idea seems to be that dishonest and greedy bankers have been able to magic demand for their toxic products and services out of thin air, for their benefit and our ruin. It is a dishonest notion, designed to comfort the rest of us that we had no complicity in our own victimhood. In this way, it smells to me just like the dotcom bust did, when retail investors and stock market commentators alike screamed bloody murder that Wall Street forced them into gambling their kids' college funds on Pets.com. The damage is more widely spread this time, of course, but so is the culpability. This is not a popular message to impart.

Nevertheless, it's past time for economic commentators who aspire to something more than leading the mob from the front to display some intellectual courage and integrity in addressing the current financial crisis, rather than rousing the rabble. There is plenty of important and interesting material to discuss, and there may even be an interesting and useful policy proposal or two that might come out of the mix.

Failing that, from my point of view they are more than welcome to shut the fuck up.

© 2009 The Epicurean Dealmaker. All rights reserved.

The Investment Banker in Winter

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Wed, 08 Apr 2009 01:37:00 +0000

I have a confession to make, Dear Readers.

Many of you may think of me as a devil-may-care, gimlet-eyed, barbéd-tongued man-about-town¹ and raconteur, but I am not everything that I seem.

For one thing, while I am in truth an investment banker and have been so for nearly two decades, I do not come to this industry with the typical investment banking pedigree. Sure, I went to university at one of the usual institutional suspects of higher ~~embezzlement~~ education, one complete with leafy groves, an endowment bigger than the gross domestic product of Botswana, and other typical accoutrements. I also received my license to rape and pillage as a certified Master of Business Asphyxiation from another of the gleaming temples of capitalist culture, one of those places where business ethics and common sense go to die.

But I do not come from a long line of investment bankers. Neither am I the black sheep seed of an upstanding pillar of a small Midwestern community, one whose prospects in life, should he wish to avoid imprisonment in the local jail, are necessarily limited to the French Foreign Legion, investment banking, or some other of the slightly distasteful professions which society maintains to employ its otherwise unwanted miscreants.

Furthermore, I did not study finance or economics in college. Then, as now, I found the topic of standard economic theory staggeringly boring, and permeated throughout with unwarranted aspirations to scientific and mathematical rigor which even I, in my barely post-adolescent state of intellectual innocence, found presumptuous and laughable. As you might imagine, I satisfied my one economics requirement without distinction and never looked back.

My ministrations at the altar of Mammon in pursuit of my MBA were similarly limited and unenthusiastic. Sure, I absorbed the lessons of CAPM, option theory, and other required parts of the canon with suitably diligent attention, but I cannot say the experience formed a high point in my intellectual development. Not that MBA programs are designed to be such, mind you: Harvard imprimatur or not, business schools in the United States are little more than glorified trade schools for "knowledge workers." ^{2, 3}

If a typical career path for investment banking is currently exemplified by a second-generation immigrant from the Indian subcontinent who graduated magna cum laude in Economics from Wharton undergrad, worked for two years as an Analyst in Financial Sponsors at Goldman Sachs, returned to earn an MBA from Harvard, and who currently works at Morgan Stanley—which is a fair précis of, oh, about 93.2% of everyone currently working in the industry—then you can safely assume I do not match the pattern. Why then, you may ask, did you ever join the industry?

Well, there's a story.

* * *

Without delving too deeply into the many years I spent wandering in the wilderness of the non-financial (i.e., "real") world between college and business school, be it known that this interlude was highly revelatory for me. I discovered, as I passed through a number of different jobs, that what I enjoyed most in all my disparate employments was the learning curve associated with each new position. While I was learning the ins and outs of new responsibilities and the variable intellectual content associated with a new profession, I found myself energized, happy, and fulfilled. But when, inevitably, the job became routine I quickly began to go quietly insane.

Eventually, I learned that which an observant companion could have told me years ago (but to whom I probably would not have listened, anyway): I have the attention span of a gnat. Give me variety, give me change, and give me shifting duties and responsibilities, and I rise to the challenge. Give me stasis, or curse me with routine, and I have to leave.

Now, as a young man even I had friends who worked in the investment banking industry, and while I was not masochistically attracted to the perpetual abuse they endured as footsoldiers in the front lines of finance, I did observe that their jobs were positively replete with splendiferous variety. Putting aside the putative glamor of overnight trips to Beijing or the burden of long, caffeine-soaked hours at the printer's, these friends were blessed—to my eyes—with unending variation in the types of deals, clients, and industries they worked on. That looked like the sort of life for me, given that my alternate plan of retiring to the South of France on the proceeds from the NY Lottery looked less certain than my monthly bills required. So, I applied to business school, in order to earn the double-secret handshake MBA certificate necessary to gain entry to Wall Street.

Almost 20 years later, I am still there.

* * *

Why the confessional now?, you may inquire.

Well, the truth is that for the first time in my career, which on the whole has been gratifyingly variable and interesting—frustrating, infuriating, and demeaning as well, of course, but never dull—I am bored out of my fucking skull.

M&A, with the exception of certain blessed industries like healthcare and financial institutions, in which I sadly do not participate, is flat on its back. In fact, M&A is so dead that the only reason the corpse hasn't been put into the morgue already is that the investment banks have fired all the orderlies who might otherwise take it there.

Corporate clients who are otherwise healthy remain firmly ensconced in their reinforced bunkers, refusing to even peek over the parapet for fear of getting their heads shot off by rampaging stockholders, government assassins without portfolio, or the ever-present and ever-intimidating vicissitudes of the ongoing recession. Clients with plenty of cash and the rare publicly-traded stock that smells better than three-week-old halibut refuse to even consider bold and aggressive corporate moves, no matter how cheap the sixteen properties they have been lusting after for decades become. Private equity, of course, is so underemployed that the majority of PE professionals have already become bored of masturbating to YouPorn during office hours. And distressed companies? Don't even get me started.

It got so bad last week that I floated around for days afterwards on the basis of a rare, lengthy intelligent conversation I had with a potential client. A client, by the way, who told me in no uncertain terms that they would reconsider buy-side M&A no earlier than six months after Hell freezes over, assuming the Geithner plan has not bombed us all back to the Stone Age. But shit! Someone actually talked with me. About M&A stuff. Damn, that felt good.

The mainstream media and the blogosphere are not improving my mood, either. Mainstream economics, economic policy, and economist and pseudo-economist wankers are dominating the airwaves, and I've already told you what I think about that. Periodically, I will rouse myself from my semi-slumber to consider a post I might make concerning these oh-so-weighty issues and arguments. But then I think: who the fuck cares? Certainly not me.

* * *

All I can say is it's a sorry state of affairs when someone with the attention span of a gnat cannot find stimulation or satisfaction. I blame all of you for this. If you don't pull your collective heads out of your collective assholes soon, I will be forced—out of sheer boredom and spite—to convert this site into a political and cultural opinion forum.

And trust me, you sure as hell don't want to see that.

¹ Herewith, I am starting a blog-based competition on the most extensive use of hyphenated adjectives in a self-descriptive context. After due deliberation, I declare myself the winner and plan to award myself a modest but attractive honorarium. Thanks for playing.
² Which is why I find it hilarious that HBS is currently undertaking formal navel-gazing in response to recent events. For chrissakes, Harvard Business School is capitalism's fucking shrine to conventional wisdom. Why in God's name should we expect its graduates to know any better?
³ It may offer you some insight into my mindset to reveal that the most interesting course I took there was a PhD seminar on the causes and origins of the Industrial Revolution. Fascinating history, economics, and culture, and not a damn equation in sight. Of course, it was a joint course offering with the Graduate History Department.

© 2009 The Epicurean Dealmaker. All rights reserved.

Looking for Mr. Goodbar

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Thu, 26 Mar 2009 14:05:00 +0000

Well, kudos to Andrew Ross Sorkin at The New York Times for having the cojones to take a crack at defining an agenda to reform the financial system. I admire his courage, at least, because I am sure he will be the target of innumerable brickbats and sniping from the commentariat (including, natch, Yours Truly), who will cumulatively find fault with almost everything he says.

He is fooling himself, however, if he thinks any sitting Wall Street chieftain will step forward to propose a plan of his own at this juncture. Certainly Jamie Dimon of JPMorgan has the intelligence and stature—as defined by emerging from the recent financial shitstorm with the smallest quantity of ordure smeared over his person—to pull it off. But Jamie is first and foremost a street-fighting son of a bitch. He has absolutely no interest in magnanimously proposing any set of solutions which might benefit his current or future competitors. Nor does he appear to give a flying fuck in a rolling doughnut about helping Congress or the US Treasury find their way out of the respective paper bags they seem to have wandered into. No, Jamie is the kind of person who says give me the rules, then get the hell out of my way. No statesman, he.

Likewise, Mr. Sorkin's other candidate for Churchillian leadership, John Mack of Morgan Stanley, is also a bust. Having been the only Wall Street head to apologize publicly before Congress during the industry's recently televised proctology exam on C-SPAN, Mr. Mack is unlikely to seek an encore. He has done his good deed for the decade, you see.

The rest of the field falls away pretty quickly. Citigroup's Vikram Pandit has the moral gravitas and public stature of Alvin the Chipmunk, having conspired with LOLFed and his own witless bumblings to transform himself into a punchline. Goldman's Lloyd Blankfein registers even lower on the personal charisma scale than colorless technocrat Tim Geithner, which is saying something. If he weren't head of the largest and most successful evil empire since Genghis Khan, I'm sure no-one would even know who he was. And don't get me started on red-faced and sputtering Ken Lewis, who grips the helm at Bank of America. Every time I see him on TV I expect his head to explode, like one of those guys in the movie Scanners.

After those five, no-one outside of the FDIC even knows who the clowns are who run our banking system (which I bet is just fine with them). A full-page editorial in The Wall Street Journal by Bob Kelly of BoNY Mellon or John Stumpf of Wells Fargo would have all the impact of a damp squib in a thunderstorm: Who?

That's just fine by me, by the way. I think all of these knuckleheads are far better advised to focus intently and exclusively on their own knitting for a while, rather than pontificating at length about the appropriate outlines of global finance's brave new world. As I can personally attest, pontificating takes a lot of time and energy (and delivers uncertain results). For now, I prefer that anyone in a position of executive authority on the Street skip policy making and focus instead on pulling his own firm's chestnuts out of the fire and paying my fellow taxpayers and me the fuck back. And quickly.

© 2009 The Epicurean Dealmaker. All rights reserved.

The Investment Banker Speaks

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Fri, 13 Mar 2009 22:45:00 +0000

Jules: "You read the Bible, Ringo?"

Ringo: "Not regularly, no."

Jules: "Well, there's this passage I got memorized, Ezekiel 25:17:
'The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men. Blessed is he who, in the name of charity and good will, shepherds the weak through the valley of darkness. For he is truly his brother's keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who attempt to poison and destroy my brothers. And you will know I am the Lord when I lay my vengeance upon you.'
"I been sayin' that shit for years. And if you heard it, that meant your ass. I never gave much thought to what it meant. I just thought it was some cold-blooded shit to say to a motherfucker before I popped a cap in his ass.

"But I saw some shit this mornin' made me think twice.

"See, now I'm thinkin' ... maybe it means you're the evil man, and I'm the righteous man. And Mr. Nine Millimeter here, he's the shepherd protecting my righteous ass in the valley of darkness. Or it could mean, you're the righteous man, and I'm the shepherd, and it's the world that's evil and selfish. ... I'd like that.

"But that shit ain't the truth. The truth is ... you're the weak. And I'm the tyranny of evil men.

"But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd."

— Pulp Fiction

The Dealmaker clan is on vacation next week. Based on past experience, that means there is a one-in-three chance the markets will go to hell in a flowered handbasket while I am away. Graze carefully out there.

© 2009 The Epicurean Dealmaker. All rights reserved.

We Live to Serve

epicureandealmaker@hushmail.com (The Epicurean Dealmaker) — Fri, 13 Mar 2009 17:18:00 +0000

Hon. Andrew M. Cuomo
Attorney General of the State of New York
Albany, New York

Re: Proposed Wall Street Compensation Rules

Dear Mr. Cuomo:

I understand that you are working with Rep. Barney Frank to design legislation which will "tie Wall Street pay to the long-term performance of the firms." This is an admirable goal, and as a taxpaying American citizen, I salute you for it.

According to the article in The Wall Street Journal this morning in which your plans were revealed to the public, you appear to be taking a measured, consultative approach in this project:

A person close to Mr. Cuomo said change is needed but the intent isn't to micromanage or interfere with the private sector.

"We certainly need to understand the industry's perspective on the potential unintended consequences of compensation reform before we finalize these long overdue changes," the person said.

This is comforting.

I believe I speak for many in the investment banking industry and the American business community at large when I say that we would find a reduction in frequency of legislative and regulatory reforms coming out of Washington D.C. and state capitals which are modeled on the trusty "Ready, Fire, Aim" approach to be somewhat reassuring. It is also refreshing to hear a regulator acknowledge the existence and risk of unintended consequences from their actions. I think few of us would object if you were to send around a brief note informing your peers in the regulatory and legislative branches of this little discovery.

* * *

As you consider a topic as charged and divisive as compensation in the financial services sector, about which every Senator, Congressman, taxpayer, and taxpayer's dog seems to have a fervently held opinion, may I humbly submit that you leaven your data collection with some input, information, and analysis from someone who—in contrast to 99.6% of the individuals offering their two cents worth in the debate—actually knows what the hell he is talking about.

Namely, me.

You could do far worse in this respect than to spend an hour or two of your time (or that of a moderately intelligent staffer) reading the posts I have published on this site over the last 15 months concerning this very topic, collected under the heading "filthy lucre." While I confess I spent perhaps an inordinate amount of time in these posts clearing away the obscuring underbrush which seems to adhere to this topic and countering the uninformed nonsense which a rag-tag collection of purportedly intelligent commentators have spewed forth in public, I have little doubt you will find a not-inconsequential number of useful and illuminating nuggets of information there which will do you no end of good.

In addition, should your (or your staffer's) desire to improve yourself extend to acquiring a more grounded understanding of the investment banking industry as a whole, you would find yourself well served by allocating a little more time to reading the more numerous posts collected under the rubric "The Life." After reading the materials collected therein, you should find that you actually know what the hell you are talking about with a far more gratifying regularity.

* * *

Having spent approximately two decades in this industry, rest assured I know whereof I speak. Furthermore, not being currently in the employ of (nor collecting deferred pay from) any financial institution in current or potential future receipt of taxpayer funds, I can confidently assert that I have no particular dog in this fight. Other than my patriotic desire to do my civic duty, and my wish as a citizen and taxpayer to do what I can to help alleviate and correct the crippling imbalances which have arisen in our financial system and spilled over to our broader economy, I have no biases in this matter. (Although I admit I will be happier if the direct and unintended consequences of your actions and those of your colleagues do not reduce the American financial system to a state of efficiency and health inferior to that of the North Korean agricultural sector.)

Should you wish to explore these matters further, I would be delighted to meet you in person to discuss them. I will make myself available on the corner of Wall Street and Broad in New York City between the hours of 3:00 am and 6:00 am Eastern Daylight Time every Wednesday, Thursday, and Friday. Should you decide to come, please bring a regulatory consultation retainer of ten million dollars in small, unmarked, non-sequential bills, plus a signed engagement letter stipulating a transaction success fee of 0.15% of all TARP and TALF funds disbursed after January 1, 2009. You or your representative should carry a clean, lightly-used Goldman Sachs duffle bag bearing an American Airlines Executive Platinum luggage tag labeled "Joe." (I will keep the duffle bag.) You will recognize me as the gentleman clad in fatigues wearing a Saddam Hussein mask.

Looking forward to hearing from you, etc., etc.

Your Humble Servant,

The Epicurean Dealmaker

cc: Rep. Barney Frank

© 2009 The Epicurean Dealmaker. All rights reserved.